Real Estate Development Joint Ventures



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A Real Estate Development Joint Venture Should Ideally Be Entered Into Between Equals
By Colm Dillon
The idea of a Joint Venture attracts a lot of individuals and as a guy who has developed $1.2 Billion worth of real estate across all market sectors, I get a lot of questions seeking advice. There are so many reasons for entering into a joint venture and if you’re thinking of going down the “JV" road, I have a few suggestions to make. In the first place let's understand why you are even thinking of entering into a real estate development joint venture, because I do so with great reluctance. After all, in a joint venture you have to take into account another person’s attitude, feelings, decision making process, (or inability to make a decision), whether they have a logical and sensible mind ... the list goes on; oh yes, what about their experience level? So, getting into a real estate development joint venture must have a good 'payback' for you ... actually, for both parties. Whatever You Lack is Usually the Reason for Entering into a JV. It would take me an age to cover all types of real estate development joint ventures, so I will concentrate on just a few. For example: The other party may have a wonderful development site and wants to develop it, but does not have the knowledge. You "love" the site and know that you could make it a very successful and profitable real estate development. Another example: Maybe two people have saved their capital, but individually the money is inadequate to undertake a project. Combining their capital and borrowing capacity will allow the real estate development joint venture to proceed. Irrespective of your reason, entering into a real estate development joint venture is ALWAYS second best to doing a real estate development by yourself. So you must be clear as to why you are considering a development joint venture, and it must be secured by a legally prepared and binding real estate development joint venture agreement before you spend a dollar. A Real Estate Development Joint Venture Agreement sets out what each party will contribute, both in money and effort, and sets out each party’s duties and obligations. It also sets out what happens if the parties fall out with each other, as well as covering the division of profits or losses. Note: There is a lot more at stake if you joint venture with your brother-in-law or other relatives ... the term 'on-going-nightmare' is a phrase that readily comes to mind. If a family real estate development joint venture breaks down, it doesn’t matter how many pages in the Joint Venture Agreement say that you were "RIGHT," ... as far as your brother-in-law is concerned, you are an 'expletive deleted .......' Just thought I'd get that one out of the way! One more thing: doing a development joint venture with a rich person, when you are many levels poorer, is also not smart. Why? Well, in simple terms, when push comes to shove “Money Rules ... “ and you know the golden rule: He who has the GOLD, RULES. Also, if the rich guy tells you not to bother with a joint venture agreement ... it appears he/she is saving you money on legal costs ... tempting eh? ... What he/she is really doing is taking away your legal rights. Yep, you'll have fewer rights than an employee. If that's the deal ... better to be an employee! Fact: you have less money than him/her. With no joint venture agreement you have no rights. I prefer a real estate development joint venture with people of equal power. Notice I did not say of 'equal skills.' It is better if you both bring different skills, hopefully aligned to the development industry like legal, finance, real estate, architectural, engineering, building, etc. In the first example I gave you above, I did my first and only JV on the basis that the partner had a wonderful city center corner location property with uninterrupted river views. Importantly, it was I who initiated the approach to the partner, as I had a market need to satisfy. So they had the land and I had the development skill. The next important point is that the partner wanted to develop an office building, as I did, but did not have the development skills. And both parties had the financial capacity to do the development. Can you see how this forms the basis of a great JV? In blunt terms: They had the land; They had financial capacity I had the skills; I had financial capacity They wanted office space for their own needs I wanted to develop office space for my needs We negotiated a 50/50 JV where they took half the office space created from the ground floor as they had a retail need and I took the upper levels. We both provided 50/50 cash. I earned a development management fee as I did all the development management work. And both partners worked well together for a successful outcome. It is important to note however, that the whole JV was set out in an agreement, where it was clear what both parties had to do and contribute. In the second example of two individuals wanting to combine their financial capacities, there is a tendency for both to concentrate on the money aspect, and this is understandable. I would suggest that they concentrate on acquiring the development skills first. From my experience of teaching people how to be developers, I know for a fact that many people start off by buying some land and then start on a voyage of discovery motivated by the question, “What Do I Do Next?” Professionals don’t start off by buying land, but beginners do; it simply amazes me. There is a myth floating around the world that development skills are something that we are all born with as if it is just natural; just buy a block of land and we will know what to do naturally. We all seem to know a guy we went to school with who developed some property and is successful; but we also remember he wasn’t too bright at school, so if he can do it then someone as intelligent as we are can do it even better. So let’s get away from intelligence and let’s talk about industry knowledge. Development is a business, like any other and it has rules, regulations, procedures and processes. Given the cost and commitment required for development, it is smart to invest in education at the beginning. You’ll be surprised and amazed at what I get you to do before you even look at buying land. Please consider the development training that I offer at my website so you are prepared for success. To conclude on the issue of money, the prime requirement of getting development finance is in creating a financially viable development proposal. Yes there are other issues; but all of them are aimed at the creation of a financially viable development deal and that is what I teach you. By definition, if you don’t have a financially viable deal, you will not get the money from any investor, partner or financier. And logically, if you don’t have a financially viable development deal you don’t want to go forward with it either. If what I have said is true, and it is, then the most important action you can take is to learn all the elements that allow you to create a financially viable development. Part of the training that I offer is how to create a feasibility study. and that is how I discovered and recommend on my web site the software created by RealData. It makes the calculation and presentation of the development figures so easy and directly applicable to what developers need to achieve. Colm Dillon www.realestatedevelopmentcoach.com Colm Dillion built his career, literally, as a developer of $1.2 billion's worth of properties in Australia including the 512,000sf Brisbane Riverside Centre. Now retired, Colm writes and blogs about real estate development at http://realestatedevelopmentcoach.com He is the author of Commercial Real Estate Development Made Easy and Residential Real Estate Development Made Easy – ebooks which can be purchased at his website. 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