Instruction by Bruce KirschPrincipal, Real Estate Financial Modeling

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

Real Estate Financial Modeling’s

Joint Venture Partnerships Basics

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Overview

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• Rationale for partnering – one-off transactions and investment funds

• Legal structuring

• Risks and rewards

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Definitions

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Principal = Sponsor

Owner of the assetDeveloper of the asset

The party that raises a fund

Investor

Invests in the transactionInvests in the fund

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Why One Seeks A Joint Venture Partner

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• As the Sponsor (Owner/Developer), you need:• Capital• Better access to lenders• 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

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• Single Transactions - Single/Special Purpose Entities – Limited Liability Company (LLC)• Ease and low-cost of formation• Multiple owners• Pass-through of taxes

• Multiple Transaction Funds - Limited Partnership (LP)• Fund Members:

• Sponsor/Developer/Owner = General Partner/Managing Member (“GP”)

• Investors = Limited Partners (“LPs”)

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One Way To View Joint Venture Partnerships

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• Multiple parties are necessary; neither alone are sufficient

• Sponsor (LLC, or fund’s 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)

Enabling The Transaction

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Work Performed and Value Created

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

• Sponsor:• 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

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Risk Exposure - Investor

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• What risks are they taking, and in what proportion?

• Investor:• Financial (majority, and significant to Investor)• Sometimes Recourse (e.g., pro-rata with Sponsor)• Reputational (via association with Sponsor)

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Types of Financial Risk

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• Front-end acquisition/development funds

• Construction budget shortfalls (shared pro-rata?)

• Operating deficits (shared pro-rata?)

• Recourse Guaranties

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Rewards

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• In what proportion are the Sponsor and Investor seeking rewards for the various risks they bear 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”

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• Unfortunately, there is no typical structure across property types, geographies, transaction 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

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• Goal: for the transaction to reach its financial potential despite all risks, present and future

• Execution requirements to achieve goal:• Top performance by Sponsor• Sound input from Investor

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