Buying Real Estate As Part Of A Joint Venture: What To Know
Buying
Buying commercial real estate may be one of the most momentous professional events around — but that doesn’t mean you have to go it alone. Thinking of embarking on your journey with a trusted business professional? Here’s everything you should know about buying real estate as part of a joint venture today.
#1 Mapping Out Your Partnership Structure:
Clearly define the roles, responsibilities, and contributions of each partner — from the financial to the managerial and beyond. In addition, a joint venture agreement should outline the terms of the partnership, including profit-sharing, decision-making processes, and even exit strategies.
#2 Types Of Joint Ventures
Not all types of joint ventures are created equal. Here are the leading formations you should keep top of mind:
- Active vs. Passive Partners: Some partners may be actively involved in managing the property, while others may provide capital and remain passive.
- Equity-Based: In this scenario, both parties contribute capital and share profits and losses based on their investments.
- Debt-Based: For debt-based ventures, one party provides financing, while the other manages the property, with profits being split after debt repayment.
When planning a commercial transaction, it’s essential that you work with an experienced pro. Read our blog for 10 reasons to work with a commercial real estate agent right here.
#3 Financial Considerations
It’s critical that you understand the initial capital investment required from each partner and determine how profits and losses will be shared, which is often based on the proportion of each partner’s contribution. Something else to consider? Joint ventures can have complex tax implications. Consult with a tax advisor to understand how income, expenses, and losses will be reported.
#4 Risk Management
Conduct thorough research and due diligence on the property and your partner to mitigate risks up front, ensure appropriate insurance coverage is in place to protect against potential liabilities, and clarify the extent of each partner’s liability, especially if outside financing is involved. This can include understanding personal guarantees on loans.
#5 Exit Strategy
Are you planning to sell out or buy out? Either way, we advise that you decide in advance how and when the property might be sold, or whether one partner will buy out the other. After this critical benchmark is established, it’s best to set a timeline for the joint venture, including milestones and potential exit points. An insider tip? Include a dispute resolution mechanism in the JV agreement to handle disagreements or changes in circumstances.
#6 Legal And Regulatory Compliance
When it comes to entity formation, you should choose the right business structure for the joint venture, such as a partnership, LLC, or corporation, to protect each partner’s interests. To check every box with permits and licensing, meanwhile, ensure the joint venture complies with all local, state, and federal regulations regarding property ownership and operation.
Are you a business owner considering DC for your venture? Read these posts next to get some insights into the local market:
#7 The Importance Of Communication
The importance of messaging in a joint venture transaction can’t be overstated. Our advice? Maintain open and regular communication between partners to address issues promptly and keep the venture on track. This will go a long way in agreeing on how decisions will be made, whether by majority vote or under obligatory unanimous consent.
#8 Market Considerations
Timing is everything, which is why we recommend analyzing the market conditions, property value trends, and potential for growth in the area where you plan to invest. The information you glean during this step will help you determine whether the property will be held for rental income, appreciation, or quick resale (flipping).
#10 Strategic Goals
Whether it’s a long-term investment or a short-term flip, all partners should agree on the end goal — which means ensuring that all partners have aligned around expectations regarding the investment’s purpose, timeline, and financial targets.
#11 Consulting Professionals
Time to bring in a professional? Here are some trusted experts who could be of assistance in your commercial real estate journey:
- Legal Counsel: An attorney could draft and review the joint venture agreement.
- Real Estate Advisors: Real estate agents and appraisers can help assess the property’s potential.
- Financial Advisors: Consult with financial advisors to understand the implications of the investment and manage the partnership’s financial realities.
