Core Features of Real Estate Joint Venture Agreement

by Paul Wright Tax Accountant Toronto - A Simple Checklist for Ch

In real estate industry joint ventures usually refer to involvement of a working partner and a financing partner. 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.

What the Joint Venture Agreement Contains

Usually the joint venture agreement is build to suit commercial real estate industry. Some of the components of the agreement are –

· Manner of distribution of profits.

· Management of rights and control on decisions relating to the joint venture.

· Exit rights and transfer rights or the membership interests of the parties in the joint venture.

Basically the joint venture agreement is a limited liability operating agreement of the real estate company.

What the Real Estate Joint Venture Agreement Specifies

There are certain things that the real estate joint venture agreement specifies clearly and unambiguously. One of the things to be specified in the agreement is the obligations relating to capital contribution by the parties concerned. Specification should include mandatory initial capital contribution to be made by each of the parties to the agreement. Usually it is the joint venture real estate investors that provides lion’s share of the contribution. Industry standards are mostly in the range of 90%-95% of the capital contribution by the financing partner in the joint venture and 5%-10% by the implementing partner. However there are also cases where the proportions are different and it could be even 50-50 depending on the availability of capital with the actual builder. Such situation occurs where the operating member has sufficient funds and desires to have greater control over the real estate project.

Specifying the Mandatory Additional Capital Requirements

It is also very important for the real estate development companies acting as the operating company as well as the investing company that works as the financing partner to know precisely their responsibilities in case of additional capital requirements. The decision and requirement is usually dependent on the type of real estate asset purchased. More often than not in case of stabilized acquisition type of transactions investing company will normally not agree to make additional investments. An example is the acquisition of real estate properties where no further developments are planned. In such cases the financing partner will stick normally to the initial capital contribution. However the case of properties where improvements are necessary is a different proposition and the financing partner may agree for investment of additional capital but there should be clean provisions in the joint venture agreement concluded.

Meeting Non-Discretionary Expenses

Both the operating partner and the real estate investment companies usually agrees to make additional financial contributions for meeting the unforeseen expenses that are non-discretionary in nature. Such expenses could be taxes, insurance payments, life safety issue costs, or necessary for complying with the law of the land.

Bottom line of all these is that to work well the real estate joint venture agreement has to be clearly and precisely drafted clarifying all the clauses precisely and that is the core feature of a good joint venture agreement concluded for real estate properties.