A real estate joint venture (JV) is a deal between multiple parties to work together and combine resources to develop a real estate project. Most large projects are financed and developed as a result of real estate joint ventures. An agreement featuring all the terms and conditions to be followed by the partners in the real estate joint venture and how the process would be carried out is concluded between the partners in the joint venture. All of the parties involved in any joint venture agreement are held responsible for the costs, income, profits, and losses of the project.
Reasons to Form Joint Ventures
Companies in the real estate industry enter into joint ventures for the following reasons:
1. New Opportunities
A joint venture agreement also enables businesses to take part in investment projects that they normally would not be able to join.
2. Cost Savings
As a result of a JV, the companies are also able to benefit from cost savings like sharing labor and advertising, thus lessening the financial burden placed on each company.
3. Combined expertise and Leveraging Resources
The companies forming a joint venture may each have unique expertise, functions, and backgrounds. A joint venture allows the parties involved to leverage their pooled resources to achieve the goal of the venture and benefit from the other's within their company. JVs can enhance and advance products and services from companies further than they would separately.
Key Aspects of a Real Estate JV Term Sheet
A real estate JV agreement involves the following factors:
1. Profit Distribution
Something to note when drafting the terms for a joint venture is how profits generated from the project will be distributed amongst the members. Equal distribution of profits may not occur in certain scenarios, such as JVs involving active and passive members.
2. Capital Contribution
The JV term sheet must stipulate a detailed amount of capital contribution expected from each member and when the capital is due. Agreements can also include additional capital contributions that may be required by each company for unforeseen expenses.
3. Management and Governance
The agreement between the companies will detail the joint venture’s business structure, the duties of each party regarding management of the business, each party’s level of control over the new entity.
4. Exit and Termination
It is key for the members of the joint venture to specify the lifespan of the project. It is beneficial to both parties to make the most cost-effective plans for dissolution. In addition, the terms must also clearly state any and all events that might allow either of the parties to trigger an early termination of the joint venture.
Creating the New Entity Between the Partners
Joint ventures in the real estate industry can be extremely beneficial to companies in achieving leverage, diversifying, lowering risk, and scaling their businesses. A successful venture relies a lot on getting the paperwork and structure right upfront. Get savvy about this, and always consult professionals for help when needed.