Real Estate Financial Modelings

Joint Venture Partnerships Basics

Instruction by Bruce Kirsch Principal, Real Estate Financial Modeling

Copyright 2009 Real Estate Financial Modeling, LLC. All Rights Reserved.

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Overview

Rationale for partnering one-off transactions and investment funds CLICK TO EDIT MASTER TITLE STYLE Legal structuring Risks and rewards

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Definitions

CLICK TO EDIT MASTER TITLE STYLE Principal = Sponsor

Investor

Owner of the asset Developer of the asset The party that raises a fund

Invests in the transaction Invests in the fund

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Why One Seeks A Joint Venture Partner

As the Sponsor (Owner/Developer), you need: Capital CLICK TO EDIT MASTER lenders Better access to TITLE STYLE Sellers to believe that you will close Better third party provider pricing Strategic and technical expertise As the Investor, you need an investment vehicle: Developments Existing income-producing properties Mortgage Notes
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Real Estate Investment Partnerships Overview

Single Transactions - Single/Special Purpose Entities Limited Liability Company (LLC) Ease and low-cost of formation Multiple owners CLICK TO EDIT MASTER TITLE STYLE Pass-through of taxes Multiple Transaction Funds - Limited Partnership (LP) Fund Members: Sponsor/Developer/Owner = General Partner/Managing Member (GP) Investors = Limited Partners (LPs)
Limited Partnership Entity

Sponsor (GP)

Investors (LPs)

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One Way To View Joint Venture Partnerships

CLICK TO EDIT MASTER TITLE STYLE

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Enabling The Transaction

Multiple parties are necessary; neither alone are sufficient TO EDIT MASTER TITLE STYLE CLICK Sponsor (LLC, or funds GP) provides: Transaction Sourcing (identifies the destination) Capital (minority share) (secures right to fly the plane) Day-to-day Execution (safe piloting and landing of the plane) Investor (LP) provides: Capital (majority share) (provider of plane, and fuel) Periodic Strategic Input (Air Traffic Control)

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Work Performed and Value Created

Who is doing more work, and presumably, adding more value?

Sponsor: CLICK TO EDIT MASTER TITLE STYLE

Allocated overhead to find and secure the transaction; took entitlement risk and Day-to-day Execution Thousands of decisions, Tens of thousands of person-hours over multiple years

Investor: Capital provider 1 decision (invest/not invest) Periodic Strategic Input - hundreds of person-hours over multiple years

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Risk Exposure - Sponsor

What risks are they taking, and in what proportion? Sponsor: Financial (minority, yet significant to Sponsor) CLICK TO EDITitMASTERSponsors STYLE Is really the TITLE capital? Personal Recourse Guaranties to Lenders (partial or full) Pledge personal assets as collateral against a loan Acquisition Loan Guaranty what if the asset ends up under water due to the market crashing? Cant just give keys back and walk away from the loan obligation Construction Completion Guaranty improvements will be complete by a specified date, lien-free and in accordance with the approved plans/specs Reputational (via execution)
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Risk Exposure - Investor

What risks are they taking, and in what proportion?
Investor: CLICK TO EDIT MASTER TITLEsignificant to Investor) Financial (majority, and STYLE Sometimes Recourse (e.g., pro-rata with Sponsor) Reputational (via association with Sponsor)

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Types of Financial Risk

Front-end acquisition/development funds
CLICK TO EDIT MASTER TITLE STYLE

Construction budget shortfalls (shared prorata?) Operating deficits (shared pro-rata?) Recourse Guaranties

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Rewards
In what proportion are the Sponsor and Investor seeking rewards for the various risks they bear CLICK TO EDIT MASTER TITLE STYLE and the various roles they play?

How can cash flow splits be commensurate with both risk taken and value added? How is it typically structured?

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No Formula
Unfortunately, there is no typical structure across property types, geographies, transaction CLICK TO EDIT MASTER TITLE STYLE types and the hundreds of thousands of partnerships investing in real estate Negotiation-specific

All revolve around the end goal

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Optimal Structuring to Achieve the Goal

Goal: for the transaction to reach its financial potential despite TITLE STYLE CLICK TO EDIT MASTERall risks, present and future Execution requirements to achieve goal: Top performance by Sponsor Sound input from Investor

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