Developers, brokers, and investors usually enter into joint ventures to build profit, access resources and expand distribution channels. Although entities often enter into joint ventures for only a limited time or purpose, members should thoroughly discuss these key considerations when structuring and handling the partnership.
The main asset and source of capital in a real estate joint venture is real property. An agreement may give each party full legal title to the property that the joint venture will use. Although some distributions are not exactly pro-rata, each party should fulfil its obligation to manage, develop, improve, purchase, sell, lease, or finance joint venture properties. To protect interests, entities should be carefully aware of property law frameworks.
Once all members arrive at a formal agreement, all parties must then agree on how they will manage the joint venture on a daily basis. The members will usually vote on who they will appoint as managers of certain operations. Managers will then have control over purchasing or selling property, hiring personnel, creating salary and budget plan, and acquiring financing. Structuring is one of the most important factors that determine a joint venture’s success.
The main reason why entities enter into joint ventures is to build profit. As such, a distribution agreement is a key consideration when splitting profits. The compensation each entity receives usually depends on a number of funds the party invested in managing and improving the property. Some agreements also include mandatory distributions and contributions.
When forming a joint venture, both parties would already discuss how and when they will terminate the agreement. The agreement should clearly discuss what types of circumstances might trigger a business divorce. Since real estate is the main asset in real estate joint ventures, both parties should agree on how they will sell the asset and distribute the profits. Some agreements may allow buy-outs, say when a member decides to leave the partnership.
To ensure the success of a partnership, parties should focus on managing and improving main assets instead of spending too much time discussing the possibility of a failure. While it’s critically important to measure damages and expect disputes, members should focus more on understanding each other’s business functions and culture to make the relationship last.