The Components and Benefits of JV Real Estate Partnerships

A joint venture will involve two or more legal entities that are completely separate from one another and remain independent operators within the venture. However, for the protection of the project and all those involved, there must be an established legal structure and a joint venture agreement that clarifies contributions, roles, profit distribution, and more.

The desired or necessary structure will vary based on the needs of the deal, but the most common real estate joint venture structures include:

• Limited Liability Company (LLC): This structure is suitable for high-dollar projects and places all involved parties in equal standing. Each entity will have equal control but potentially with different ownership percentages. An LLC is the most common business structure for joint ventures and doesn’t change roles and responsibilities.[1]
• Corporations: Incorporation options include S corporation (U.S.-based only) and C corporation (global), which are typically more costly to establish. S corp status provides additional protection against double taxation, and members are considered employees of the corporation who must be paid a salary.[2] A C corp status is taxed twice (entity and stakeholders).
• General or Limited Partnership (LP): A limited partnership limits the involvement of one or more parties who will act as a silent partner and not be involved in the major decisions. A general partnership is more equal but may not be sufficient for the complexities of a commercial real estate transaction.

Control is generally shared in a joint venture; you must be willing to share some creative vision and control to collaborate well with others. The joint venture agreement determines the controlling interest more so than the legal structure. The agreement will stipulate who is in charge of what, who contributes what funds, assets, or services, what the profit distribution will look like, and what the exit mechanism will be.

In most cases, the property developer or asset manager retains control of operations and decision-making. Creating an agreement that is equally favorable to everyone involved and working with people you trust is critical for commercial joint ventures.

In the example above, the distribution of roles looks like this:

• Party A is responsible for the land contribution.
• Party B is responsible for construction management, adding credibility to the project, and assembling the connections needed to execute the vision.
• Party C is responsible for providing funds or credit to cover expenses.

The joint venture approach is the one that offers the highest benefits coupled with the lowest possible liability. By sharing in the venture together, you capitalize on each other’s strengths and weaknesses and mitigate the risk of solo endeavors. Other benefits include:

• Resource Sharing: Where you lack, others can supply.
• Additional Capital Accessibility: Everyone is just one person away from another cash injection and greater capital contribution.
• Shared Risk and Liability Distribution: We’re all in this together for profit, risk, and liability. Sharing the load reduces each individual’s responsibilities.
• Access To Credibility and Expertise: JV real estate deals connect you with experienced professionals, investors, and stakeholders who can round out the team for optimal performance and increased credibility, resulting in a stronger outcome.