![]() The developer member typically oversees construction and manages day-to-day operations of a completed project through an affiliated management company, and the venture agreement should empower the developer member to fulfill those obligations. (C) Third, the balance, if any, 60% to the Capital Member and 40% to Developer Member. (B) Second, to each Member in an amount equal to the Unreturned Capital Contributions of such Member, to be shared by the Members in proportion to their respective Unreturned Capital Contributions (typically 95/5 or 90/10) (A) First, to each Member an amount equal to such Member's Preferred Return, to be shared by the Members in proportion to their respective Capital Contributions ![]() Following is a simple JV waterfall sample: After the members have obtained those returns and a return of their capital, there is often a "promote" (sometimes referred to as "carried interest") that incentivizes the developer member by granting it a disproportionate share of distributions after the preferred returns are achieved. Real estate joint ventures typically establish a series of thresholds or waterfalls that provide a set percentage return to each member based on their capital contributions. In terms of ultimate aims, the provisions governing distributions comprise the most critical section of a joint venture agreement. In such cases, the JV agreement should establish the capital contribution imputed to the developer member for those pre-formation costs and contributions. Developer members often incur significant costs prior to a capital member's initial investment, and sometimes own the land to be acquired by the venture. In these situations, either the joint venture agreement or another binding document (as opposed to an expressly non-binding letter of intent) should be completed prior to the capital member's funding any capital. In certain situations, the developer member may negotiate for access to the capital member's cash earlier in the process to cover due diligence costs, pay up-front lender fees and provide other pre-development capital. Ideally (particularly from the perspective of the capital member), the following events will occur simultaneously: (1) acquisition of the land, (2) closing of the construction loan, and (3) the capital member's initial contribution. Orchestrate Timing of the Initial Investment ![]() A joint venture agreement should address guarantor obligations associated with the initial financing, guarantor requirements of future refinancings, and the treatment of payments made pursuant to guarantees. Capital members generally expect their risk to be limited to their investment and will require the developer member or its affiliates to provide any guarantees, but some developers do not have sufficient net worth to satisfy lender requirements. In either case, a joint venture term sheet should allocate the guarantor obligations. Stabilized assets are often financed through non-recourse loans that will require a guaranty for certain recourse carve-out events, and construction lenders almost always require full completion and payment guarantees. Keep Financing in MindĪlmost all real estate projects require third party financing. Absent tax or other countervailing consideration, LLC structures are normally used. Some states and foreign jurisdictions, however, create adverse tax consequences for investors in LLC's, which mandates the use of general or limited partnerships. LLC's offer the benefits of limited liability to all members, simplicity of formation, and a potentially nimble management scheme. In recent years, most joint ventures have been formed as limited liability companies. Careful attention to the following considerations increases the odds of a prosperous relationship. Though this marriage of resources has obvious benefits, poor planning in the initial stages can lead to an ugly divorce. In their simplest and most typical form, real estate joint ventures combine the real estate expertise of a developer member with the equity of a capital member. Joint ventures are a time-honored structure through which to develop real estate.
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