![]() The goals of the two different JV partners are definitely aligned, but they are different because of their distinct roles. Comparing/Contrasting the Goals of the Partners Therefore, the operating partner should be firm in securing enough autonomy in the JV agreement to ensure that the capital partner cannot derail the most important decisions that the operating partner needs to be make for the JV to achieve and maintain success. From the perspective of the operating partner, the right of control may be the difference between success or failure of the JV, i.e., the capital partner may be in position to veto action that the operating partner considers essential for the JV’s success. The major decisions provision of the JV agreement is not a boilerplate term and is subject to negotiation. Voting rights should clearly establish a decision-making hierarchy and clarify who holds decision making authority over the JV. In some cases, the capital partner can force the major decision to happen (i.e.,operating partner cannot block it), and in other cases, the capital partner has only veto or blocking rights. ![]() The major decisions that the capital partner has the right to veto generally include all loans or financing arrangements, the acquisition of additional real property, the sale of JV assets, property management agreements, major leases, deals with affiliates, oversight of lawsuits, filing for bankruptcy, granting liens on JV assets, mergers, and spending the JV’s funds above certain approved limits, and granting of easements. The operating partner will typically serve as the “managing member” or “manager” with the authority to bind the JV to contracts with third parties, but these decisions may be subject to specific approval rights granted to the capital partner. Management and voting rights of each of the JV partners and formal meeting requirements should be addressed in the JV agreement. Further, the JV agreement should specify what happens when additional contributions are required and, in that regard, if the additional contributions are not made, how the ownership interests of the various participants will become diluted. In most cases, the capital partner is not involved in the JV’s day-to-day management or operations, although the capital partner is likely to insist on having approval or control rights over “major decisions.” The JV will typically raise about 20% to 50% of the total amount of the equity capital needed for the project and then obtain debt financing from a bank or other lender for the remaining capital needs.Īs discussed below, the JV agreement details the specific initial financial contributions that each partner is required to provide. The capital partner is typically a passive investor (again a person or an entity) who provides the bulk of the equity capital that the JV needs. ![]() The JV typically has two categories of partners: the “operating partner” and one or more “capital partners.” JVs are frequently used by experienced real estate developers to obtain the capital they need for their projects. ![]() What Is a Real Estate JV and Who Are the Players?Ī JV is commonly defined as a combination of two or more parties (people or entities) that is formed to acquire or develop and own, lease, manage and sell one or more real estate assets. This post reviews a number of issues that commonly arise between partners in forming, operating, and exiting the JV. Entering into a JV agreement should be done with care, however, because it is not uncommon for conflicts to arise between the partners during the development or operation of the project, exiting from a JV can be an experience that is not for the faint-hearted. JVs are typically governed by a written JV agreement that establishes the duties, obligations, responsibilities, and expectations for the parties to the agreement. These JVs are often used for the purpose of buying, developing, leasing, operating, managing, and ultimately selling for a profit, real estate assets. ![]() Most of our posts focus on issues related to Texas private companies such as LLCs or corporations, but the real estate joint venture (JV) is another distinct but common way for two or more private parties to form a legal entity. ![]()
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