Structuring Joint Venture Agreements in Real Estate Syndications

Learn about the essential elements and best practices for structuring joint venture agreements in real estate syndications and investment funds. To get started with your syndication or fund visit https://www.moschettilaw.com

Joint venture agreements are a cornerstone of successful real estate syndications and investment funds. These agreements outline the roles, responsibilities, and profit-sharing arrangements between parties involved in a syndication. Understanding the key components and best practices for structuring these agreements can significantly impact the success and compliance of your real estate projects. This discussion covers the crucial elements of joint venture agreements, including capital contributions, management responsibilities, decision-making processes, and dispute resolution mechanisms. Additionally, it delves into compliance with SEC regulations and the importance of clear, detailed documentation to protect all parties involved.

Read more about syndication structures: https://www.moschettilaw.com/syndication-structures

Read more about compliance in syndications: https://www.moschettilaw.com/compliance-in-syndications

Moschetti Syndication Law Group is a boutique syndication law firm, serving small and growth-bound syndicators, as well as private equity firms. Our attorney, Tilden Moschetti, is determined to keep the firm’s ‘boutique’ size so we can tailor the services to each client’s unique needs without turning the firm into a faceless factory churning out private placement memorandums or passing unnecessary overhead expenses onto our clients. (As our client, you’ll only pay a fixed fee, so no surprises.) As for the client experience, we give real-time answers with Tilden Moschetti without making you book an official appointment or get passed along to associates or paralegals. We’ll work with your ambitions and overall vision to help you close the current deal and fill in that ‘missing’ piece – whatever you need – to keep adding more syndications to your portfolio. We keep syndicators syndicating (TM).

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Episode Transcript

Tilden Moschetti (00:00):
Many times a syndication or an investment
fund isn't just one sponsorcoming together to do this, to
find investors, to do the wholeprojects. It's two or three.
Sometimes you're doing what'scalled a joint venture, where
multiple parties areparticipating, as the GP or the
sponsor, the manager, howeveryou want to call it for

(00:21):
yourself, and exactly how do youdo a joint venture agreement?
What are those key tips to makesure the joint venture is
successful, so that at the endof the day, investors are happy
and keep investing with you oneof the sponsors,

(00:42):
you one of the reasons we talkabout joint ventures is because
they happen a lot, right? Soyou've got one team that's very
good at one thing. So forexample, it might be something
about, well, we're very good atfinance and identifying projects
and opportunities, but we're notso good at developing itself and

(01:06):
actually doing those projects.But the people who we want to be
developers want to be involvedand be part of the GP as well
for their own needs. That'scalled a joint venture. When the
two groups come together, orthree groups come together for
that common purpose. When thatcommon purpose also has passive
investors coming in, then it'sstill an investment. It's still

(01:28):
a syndication, right? It's stillconsidered a security. Just this
portion here, that's the generalpartnership, because everybody's
very actively involved. Is notthe security? What's the
security is the pass of peoplewho have come in as part of it.
Now, there are multipledifferent things to keep in mind
and making sure that it allworks. Well. I've got five

(01:51):
different tips that I think aregoing to help you with your own
joint venture as part of asyndication or investment fund.
One thing when you're doing thatsyndication with joint venture
partners, that you've got to dois each one of the parties needs
to have clearly identified rolesand responsibilities. What are

(02:12):
their What are they doing? Whatare their contributions? Now,
I've done other videos, and wecan link to that here, about
talking about roles andresponsibilities. But the other
thing that has to be thought ofis, what's the contribution?
Right? That needs to be clearlyidentified. If one group is
coming up with all the cash, thesecond group probably needs to
know that, as well as the firstgroup, they need to know what,

(02:34):
who's contributing what, notonly in terms of dollars,
though, also what's veryimportant is the contributions
of time. Is this one group goingto be doing all the finding of
the asset? Is this group goingto be doing all of the
development? Are they only doinga piece of it? Whatever those
things are you want to thinkthrough them, identify them, and

(02:55):
incorporate them into your jointventure agreement, so
ultimately, you can make itsuccessful. Part of this, too,
is coming up with the keycomponents that are that are
part of the the joint ventureagreement. So once you've
identified, you know, kind ofthose roles and
responsibilities, we also needto go through those, those

(03:18):
components that just arenecessarily there, first on,
foremost on everybody's mind, isprofit sharing. Exactly. How are
profits going to be splitbetween everyone? Are these
people's expenses going to getpaid or not? Is it just a
straight percentage? How is thatpercentage divided up? What does
that look like? It can be a lotof different things, but it

(03:41):
needs to be able to be somethingthat everybody knows about has
agreed to ahead of time beforeit's six months later, one year
later, and then there's somedispute over it. Well, no, we
were going to be splittingprofits, 5050, well, no, but
that was after expenses that Ihad, or whatever it is. It needs
to be taken care up front itshould be in your joint venture

(04:02):
agreement. Also there ismanagement responsibilities.
Who's involved with the piecesof the puzzle itself? Who's the
one that makes the decisions onthe on behalf of the joint
venture? Is one group going tomake all of those decisions and
the other people are just activeparticipants, kind of under
their direction, or does it looksomething more like, well, we're

(04:23):
each going to decide mutually,and if there's a dispute over
those, how are those going toget resolved? Lastly, how is the
exit going to take place for thejoint venture itself? Who makes
the decision on timing? How doesit actually get structured?
Who's responsible for what thosethings are, all key components

(04:45):
of that joint venture agreement,there are legal considerations
when we're thinking about jointventures as well. Certainly,
structurally, that's a big one.Most of the time I like to put
the joint venture participantsthemselves. Each of those
individual GPS, two or threeare, however many people coming
together underneath its own LLC.I do that because I find it

(05:09):
easier to manage the the othercomponents when we've got sort
of an operating agreement as themain body, the main working
document, rather than a jointventure agreement. This is a
stylistic thing. It's notactually critical whether you
use this particular style orwhether it's a joint venture
style. That's just my generalpreference. I like to do it that

(05:33):
way. It also obscures for theinvestors who don't need to know
how that relationship works. IfI have a situation where I've
got a joint venture and I don'tdo that, there needs to be,
there's going to be somevisibility to the investors on
how money is getting split up,how roles and responsibilities
are getting split up. I findthat not to be as advantageous.

(05:55):
Investors want to be able tothink, Okay, I've given this,
this, my money to this. It's allworking for me. Yay. They don't
want to get caught up in thedrama between different joint
Venturers. So the other thingthat we obviously need to think
about is, when we've got thatstructure, is compliance rules.
We need to make sure that thatjoint venture didn't

(06:17):
inadvertently create a securityamongst other of the joint
ventures, which most of the timeis doable to do, but we need to
define the roles andresponsibilities to make sure
that somebody is taking just apassive role, the investment of
money, the expectation ofprofit, relying on the use, on
the work of another. That's thedefinition of a security if this

(06:40):
person is coming in as a jointventure and they're just giving
money and expecting some sort ofprofit, it's a security. It's
not a joint venture. We've got aproblem here, and that needs to
be dealt with ahead of time. Andlastly, we need to make sure
that the drafting of thedocument goes along in a way
that all of the partiesunderstand what those different

(07:02):
components are, how they fittogether. So nobody feels like,
Well, I wasn't a part of theconversation at the beginning.
So with all these differentthings coming together, why
would you do a joint venture?Well, obviously, it's to pool
resources, right? It's to poolresources. And I don't just mean
money, it's also expertise, it'salso investors. Those people

(07:27):
come together. When you'reputting together a larger team
that is a joint venture, youneed to make sure all the pieces
are there, and many times we cando that through the joint
venture. So everybody feels someautonomy from each other, but
they also feel like they'regetting their what they deserve
and what their contribution is.So that pooling of resources is

(07:48):
a huge benefit of doing it.Another really is sharing that
expertise. You may have a lot ofexpertise in putting these deals
together, but you don't haveexpertise in the specific asset
class, or you don't have thespecific expertise in some
component of it that you wishthat you had by doing a joint
venture again, that you'rehaving parties come together,

(08:11):
and you're taking advantage ofthat expertise for the whole
syndication, which ultimatelygoes to the investors. There's
also a sharing of the risks, andso if you're sharing in the
costs of putting things togetherand the time you're putting in
together, if everything dies andfalls flat, well each of you may
have contributed 50% of what youwould have initially contributed

(08:33):
to it, and so there's less lostat the end of The day.
So what's the downside? Well,first off, there are some risks
to it. Most importantly ismisaligned objectives. Now this
should be taken care of byputting together a proper joint
venture agreement. If you'redoing that, you probably have

(08:55):
identified along the way whateach of your team's objectives
are. We want objectives to bemutually aligned. We don't want
them to be at cross purposes.Otherwise. Why are we even doing
this deal together at the firstplace? But we need to. So we
need to make sure that we've gotthose objectives that are good,
not only for short term, butalso for long term. I want to

(09:16):
put this deal together becauseit's going to help us transform
into a very large read with thiswell, that could be very
different from well, we want tostay small and nimble, and we
want to do you know this and andjust make maximize the amount of
profit, or whatever it is. Thosecould be misaligned, and it's
helpful to identify that aheadof time. There's also a risk of

(09:39):
dependency. So we may have asituation where one of the one
of the joint Venturers iscompletely dependent on the
other. This isn't a good asituation, because we put it the
you put that one party in aposition where they really need
to need the other more than thethan the first guy does, all
right, so we. Need to create asituation where there's a plan

(10:02):
to really raise the level of allthe joint Venturers so that
they're mutually satisfied. Now,in one deal, maybe it's not so
so important, but by deal two orthree, very important to do
this. It is a risk and it is aproblem. And lastly, it is more
complex to manage a jointventure, because you've got got,

(10:23):
not only are you managing a setof investors that all have some
autonomy built into them, and sothat can be a potential risk.
Now, that's not that all beingsaid, it oftentimes makes sense
to do a joint venture inside ofa syndication and an investment,
an investment fund, if you needhelp putting that together. My

(10:45):
name is Tilden moschetti. I am asyndication attorney, and we
work with syndicators investmentfunds to put together deals and
structured deals in a way thatreally makes their clients
money, makes their investorsmoney, but also makes you a lot
of money as well. And we havethe expertise of having put
together so many joint ventures,working in joint ventures with

(11:06):
boots on the ground experienceas well, because I've done that
for myself, and we can help youwith that process too. If you'd
like to talk about your project,don't hesitate to give us a
call, send us an email, get intouch, and we can set up a
meeting to go through whatyou're working on. You.