Real Estate Joint Venture Partnerships Basics


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Real Estate Joint Venture Partnerships Basics

  1. 1. Instruction by Bruce Kirsch Principal, Real Estate Financial Modeling Copyright © 2009 Real Estate Financial Modeling, LLC. All Rights Reserved. Real Estate Financial Modeling’s Joint Venture Partnerships Basics
  2. 2. Overview <ul><ul><li>Rationale for partnering – one-off transactions and investment funds </li></ul></ul><ul><ul><li>Legal structuring </li></ul></ul><ul><ul><li>Risks and rewards </li></ul></ul>
  3. 3. Definitions Principal = Sponsor Owner of the asset Developer of the asset The party that raises a fund Investor Invests in the transaction Invests in the fund
  4. 4. Why One Seeks A Joint Venture Partner <ul><li>As the Sponsor (Owner/Developer), you need: </li></ul><ul><ul><li>Capital </li></ul></ul><ul><ul><li>Better access to lenders </li></ul></ul><ul><ul><li>Sellers to believe that you will close </li></ul></ul><ul><ul><li>Better third party provider pricing </li></ul></ul><ul><ul><li>Strategic and technical expertise </li></ul></ul><ul><li>As the Investor, you need an investment vehicle: </li></ul><ul><ul><li>Developments </li></ul></ul><ul><ul><li>Existing income-producing properties </li></ul></ul><ul><ul><li>Mortgage Notes </li></ul></ul>
  5. 5. Real Estate Investment Partnerships Overview <ul><li>Single Transactions - Single/Special Purpose Entities – Limited Liability Company (LLC) </li></ul><ul><ul><li>Ease and low-cost of formation </li></ul></ul><ul><ul><li>Multiple owners </li></ul></ul><ul><ul><li>Pass-through of taxes </li></ul></ul><ul><li>Multiple Transaction Funds - Limited Partnership (LP) </li></ul><ul><ul><li>Fund Members: </li></ul></ul><ul><ul><ul><li>Sponsor/Developer/Owner = General Partner/Managing Member (“GP”) </li></ul></ul></ul><ul><ul><ul><li>Investors = Limited Partners (“LPs”) </li></ul></ul></ul>
  6. 6. One Way To View Joint Venture Partnerships
  7. 7. Enabling The Transaction <ul><ul><li>Multiple parties are necessary; neither alone are sufficient </li></ul></ul><ul><ul><li>Sponsor (LLC, or fund’s GP) provides: </li></ul></ul><ul><ul><ul><li>Transaction Sourcing (identifies the destination) </li></ul></ul></ul><ul><ul><ul><li>Capital (minority share) (secures right to fly the plane) </li></ul></ul></ul><ul><ul><ul><li>Day-to-day Execution (safe piloting and landing of the plane) </li></ul></ul></ul><ul><ul><li>Investor (LP) provides: </li></ul></ul><ul><ul><ul><li>Capital (majority share) (provider of plane, and fuel) </li></ul></ul></ul><ul><ul><ul><li>Periodic Strategic Input (Air Traffic Control) </li></ul></ul></ul>
  8. 8. Work Performed and Value Created <ul><li>Who is doing more work, and presumably, adding more value? </li></ul><ul><ul><li>Sponsor: </li></ul></ul><ul><ul><ul><li>Allocated overhead to find and secure the transaction; took entitlement risk and </li></ul></ul></ul><ul><ul><ul><li>Day-to-day Execution – Thousands of decisions, Tens of thousands of person-hours over multiple years </li></ul></ul></ul><ul><ul><li>Investor: </li></ul></ul><ul><ul><ul><li>Capital provider – 1 decision (invest/not invest) </li></ul></ul></ul><ul><ul><ul><li>Periodic Strategic Input - hundreds of person-hours over multiple years </li></ul></ul></ul>
  9. 9. Risk Exposure - Sponsor
  10. 10. Risk Exposure - Investor <ul><li>What risks are they taking, and in what proportion? </li></ul><ul><ul><li>Investor: </li></ul></ul><ul><ul><ul><li>Financial (majority, and significant to Investor) </li></ul></ul></ul><ul><ul><ul><li>Sometimes Recourse (e.g., pro-rata with Sponsor) </li></ul></ul></ul><ul><ul><ul><li>Reputational (via association with Sponsor) </li></ul></ul></ul>
  11. 11. Types of Financial Risk <ul><li>Front-end acquisition/development funds </li></ul><ul><li>Construction budget shortfalls (shared pro-rata?) </li></ul><ul><li>Operating deficits (shared pro-rata?) </li></ul><ul><li>Recourse Guaranties </li></ul>
  12. 12. Rewards <ul><li>In what proportion are the Sponsor and Investor seeking rewards for the various risks they bear and the various roles they play? </li></ul><ul><li>How can cash flow splits be commensurate with both risk taken and value added? </li></ul><ul><li>How is it typically structured? </li></ul>
  13. 13. No “Formula” <ul><li>Unfortunately, there is no typical structure across property types, geographies, transaction types and the hundreds of thousands of partnerships investing in real estate </li></ul><ul><li>Negotiation-specific </li></ul><ul><li>All revolve around the end goal </li></ul>
  14. 14. Optimal Structuring to Achieve the Goal <ul><li>Goal: for the transaction to reach its financial potential despite all risks, present and future </li></ul><ul><li>Execution requirements to achieve goal: </li></ul><ul><ul><li>Top performance by Sponsor </li></ul></ul><ul><ul><li>Sound input from Investor </li></ul></ul>