What is a Joint Venture?
A joint venture (JV) is a collaboration between two or more business entities for the purpose of starting a new business activity. Each party contributes value to the joint venture and agrees how to divide up income and expenses.
Where a JV Fits In
Fundamentally, a joint venture partner is needed when a developer does not have the necessary funds or expertise to complete a project. However, they do have the construction know-how and confidence to be successful.
The developer’s motivations to enter into a joint venture are these:
- The passion to build apartments
- The need to have a partner who has experience building or funding apartment projects
- A partner who will share the risks
- A need to maintain some liquid capital by finding alternative sources of equity for their project
- The drive to learn as they proceed
- The desire to build and/or strengthen relationships
Advantages and Risks of a Joint Venture
There are several advantages all parties to a joint venture will enjoy
- The investment, or initial capital, is shared between the parties
- Some expenses can be shared, reducing overall costs
- The technical and financial expertise is shared, making the joint venture stronger than its parts
- New markets can be considered when relevant local knowledge may benefit the venture
- New or more diverse revenue streams can be considered
- Overall market credibility can be enhanced
- Competitive pressures can be met successfully
However, there are some risks associated with joint ventures:
- Failure to initially communicate and define clearly overall objectives can strain relationships as time goes on
- Poor cooperation or cultural mismatches will threaten a relationship
- Failure to define at onset the roles expected will result in one party feeling taken advantage of, leading to problems
The Capital Stack
Building apartments requires a great deal of money, often too much money for the new developer alone. Therefore, some additional financing must be arranged. That financing comes from many different sources. Collectively, those sources are referred to as the capital stack, each source coming with its own collateral, return expectation, and repayment priority.
Within the capital stack, it can get quite complicated. You’re not only running your construction budget like you normally do or running an investment model, you’re also managing the investment returns for your partner(s), showing them what they can make.
The Developer’s Position Within a JV
Joint venture partners need reassurance that the deal is sound. This is about you, as an apartment scientist, homework all done, feasibility study in hand providing the needed proof that the deal is viable, and a profit can be made. A developer needs to go in prepared with a complete package and a firm understanding of what the lender’s needs are. Our feasibility study should be the first thing you show them.
Want to know more?
Visit our Apartment University: coming soon to https://learn.derek-lobo.com/pages/home-page-temporary
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