A real estate joint venture (JV) is a deal between multiple partners to work together and share resources to develop a real estate project. While a joint venture can take many forms, typically one party will provide the expertise while the other party provides the financing. They agree to share ownership and profits in proportion to the contribution each partner has made.
The Operating Partner
The investor will typically provide the funding and the operating partner will provide the “sweat equity” and professional guidance. The operating partner needs to be an expert on real estate projects and able to take responsibility for the daily operations and management of the property. It’s also the responsibility of the operating partner to be fully transparent and provide accurate reports to the capital partner.
The Capital Partner
The investor (also called the cash partner or capital partner) will enter into a joint venture with a trusted person or company who has the expertise to find, purchase, rehabilitate (if necessary), and manage commercial real estate.
Generally, the capital partner (or partners, if there are more than one) provide 100% of the initial funding. This comprises the down payment, closing costs, and renovations funds.
For the capital partner, it’s all about the financial return and the limited amount of involvement they have for the day-to-day aspects of the deal and the management of the property. Investors are often busy people with successful businesses or careers, families, and other activities they want to focus on. They want to be involved in real estate but they have neither the time nor inclination to become experts in the industry.
How Canadian Joint Venture Real Estate Deals Are Structured
The joint venture agreement describes the requirements of the joint venture including its objective, ownership rights of the project, the financial contribution of the capital member, delegation of management responsibilities, and how profits will be allocated.
In most cases, the capital member and the operating member of the real estate joint venture set up the project as whereby each party owns a portion through a bare trust. Each party might decide to own this through a corporation or personally. Other types of corporations, partnerships, and business arrangements can all be used to set up a joint venture. This is one reason why an investor should always work with a trusted operating partner who has a sterling reputation and offers full business transparency.
How the partners divide the operating profit can be as simple as a 50/50 split. If and when the property is sold, the initial investment by the capital partner is often repaid first, followed by any capital the operating partner has invested, and then the remaining proceeds are split according to the ownership shares specified in the ownership agreement.
Participants can create whatever structure they feel is appropriate given what each party is bringing to the table. For example, if the capital partner provides significant experience and expertise, and does some of the work, then perhaps a 40/60 structure would be fair, with the operating partner getting 30 percent. Some deals involve two cash partners, making the split 25/25/50, with the investors splitting their equity.
Make Sure The Real Estate Partnership is a Good Fit
Joint venture real estate deals are long-term business relationships. When you enter into one, you need to carefully consider the people with whom you’re making a partnership. It needs to be a good fit and that the structure you select makes sense given what each party is bringing to the table.
When it comes to money and investing, everyone has a different goal. When meeting and talking to prospective JV partners, it’s a good idea to get a good understanding of your monetary priorities why you want to invest in real estate. You may see it as a way to get a steady return, or for the freedom of receiving passive income, or as a way to build your retirement fund.
It’s very important to think about what you’re doing and why you want to do it. A clear and powerful sense of what you hope to achieve will guide you when you make your decisions, instill confidence when you speak with lenders and joint venture partners, and enable you to align yourself with the people who have the money or the deals that fit perfectly with your reasons for doing what you’re doing, and not just the bottom-line goals you’ve set for yourself.
Four Questions To Ask Yourself Prior to Jumping Into A Real Estate Joint Venture
Here are four questions you can ask yourself as you contemplate entering into a joint venture real estate project as a capital partner.
- What value do I add to the partnership, and what value do I need my operating partner to have to make the project successful?
- What is my time horizon for the investment? Do I expect a quick return, or am I looking for steady growth over the long term?
- How actively involved do I want to be in this investment? Do I want to “set it and forget it,” or do I want to be more hands-on?
- How comfortable am I with using creative strategies to acquire real estate?
For example, an increasingly popular way to finance the purchase of a multi-family property is through the use of seller financing. There are numerous advantages to this approach, in which no bank is involved. Because there’s no waiting for the bank loan officer, underwriter, or legal department to approve the loan, the deal often closes faster. Closing costs are lower, and the buyer avoids the cost of mortgage or discount points, origination fees, and many other charges that lenders routinely level during the financing process.
A strategic joint venture is a powerful and efficient way to structure the initial investment and subsequent ownership of a multi-family property in Canada.