Creating a Winning Joint Venture

It's all in the Planning
A joint venture is a great way for investors with common goals to pool their resources and leverage themselves into buying opportunities they might otherwise not have individually.  It also allows investors who do not have the ability to participate in daily activities of real estate investing or development to do so.  In effect, they become “silent partners.”

Most real estate developments have used “other people’s money.”  That can help you achieve your goals, but how do you make sure your investment is a “winning” joint venture?  How do you avoid disputes between the parties?

Define Your Goals
The goals of the joint venture must be clearly defined in writing.  Write a business plan.   Don’t get caught up in the excitement of jumping into a venture.  There is no doubt that disputes will arise without a well-written plan.  The business plan should be robust and include everything from:

• Clearly defined objectives of the joint venture
• Very specific operating budget
• Detailed project timeline
• Exit strategy

Identifying Your Objective
At first glance, this may seem obvious.  Everyone wants to make money.  However, each of the partners may have a different idea of how that will be achieved.  A partner who doesn't have much money to invest, but has time to manage the project will most likely need a paycheck and will want to make a profit.  A partner with capital, but who does’t have much time to manage, needs to be reassured that he/she will receive a return of their original investment plus a healthy profit.  A trust has to be formed between the parties that each partner will receive what they bargain for.   

Creating a Specific Budget
The budget needs to be specific.  The worst disasters in real estate projects are those where the investors were not realistic about the budget.  Don’t guess at supply and labor costs; get bids from contractors.  Write out a budget in great detail.  If one or more of the partners needs to extract income from the project on a regularly-scheduled basis, now is the time to say so.  Likewise, write it in the budget if an investor needs regular interest payments rather than allowing the interest to accrue. 

Every project has its delays, frustrations and un-budgeted items.  Decide up front how these issues will be handled as they appear.  Will the partners with money put more into the project?  If so, how will they receive a return on their investment?  You will have disputes between those who feel like they have to contribute more to the project than others if this is not clearly defined well in advance.

One incentive will be to offer investors the ability to accrue interest on their money as well as the opportunity to make a profit.  The accrued interest would be paid before any proceeds are paid to other partners.  If it’s an investment that will be held for some time, the agreement could be to pay investors their accrued interest once the property generates a previously agreed upon net operating income, but prior to some or all of the management fees being paid.