Zack Childress – Real estate joint ventures are a time-honored structure which means pooling of capital and sharing both risks and rewards of the property investments. Two people or two groups with different knowledge about the industry get together and sign a deal; the reason for their grouping may be because one party has local expertise and knowledge, whilst the other has equity to invest. With that said, some of the other reasons why they merge and operate it are, it allows tagging along opportunities that are larger than expected, gain a competitive advantage in a specific market, establishing an existence in a foreign country, increased revenue; lowered costs, access to another company’s technology functions, expanded customer base and product distribution and much more. The exposure to these larger opportunities is sometimes not possible when done single-handedly. Seeing that, the grouping of resources are good and has benefits that are obvious, lack of proper planning in the initial stages might result in disagreement. Hence, coming to terms and signing the contract is said to help, moreover, it is imperative for both the parties to revisit the fundamental terms and structuring options that will avoid any confusion in the future!
Joint venture structure choice
In general, there are three mediums used for real estate joint ventures and it includes limited partnerships or investor partnerships; offshore or unit trusts; and onshore or offshore limited liability companies. If you are settling down the option of offshore, then you need to deliberate on the cost of running the structure together with the management and decision-making factors, however, tax considerations and authoritarian or regulatory considerations are the trigger points.
Determining how discrepancies on key issues are getting to terms in relation to the management of the real estate joint venture agreement is what Deadlock resolution clause is all about. It is quite complicated. Deadlock provisions exist for all types of businesses; however, they vary between different countries and with due respect to the transaction involved in the business. This theory as aforesaid is quite complex and when it comes to real estate joint venture, it is even more complicated, and hence extra care should be given while signing the contract.
The importance of a resolution mechanism can’t be overlooked; this helps both the parties and the real estate asset to not get trapped in no man’s land mainly because of the clash of the two parties to settle on a particular action until further notice. So, without much ado, let us look at some of the significant issues to deliberate in drafting the provisions explained below take account of; a) The appropriate lock-out period, b) the enclosure of comprehensive closing mechanics which take account of: time frame to decide on, redeployment of any at risk deposits, on condition that for representations and service contracts from the party that wants to transfer, prerequisite to transmit good title to the interests free and clear of all liens and encumbrances, and finally the closing date. Let us have a look at the typical resolutions that will work out when the parties are unable to settle on a major decision.
- Arbitration- In order to determine certain important decisions for which a complete unwind of the JV would not be enviable, a joint venture agreement may consist of an arbitration means which would let a way out. Even though it is not a universal remedy, depending on certain cases and the project complexity this may make up the only viable option.
- Buy/sell- In a joint venture, any one or both the parties may have the right to set off a course of action, whereby one party will pay for the other out of their own interest in the JV. However, the party that is triggering the buy/sell option is supposed to send an offer that concurrently performs as a tender to either acquire the other member’s interest in the joint venture or, instead, wholesale the triggering member’s interest in the JV.
- Rights of first refusal (ROFR) – The right of first refusal clause is a contractual right that grants its possessor the opportunity to enter a business transaction with the holder/ proprietor of the real estate asset, according to particular terms, before the owner could enter into that particular transaction with the involvement of a third-party. To be clearer, both the parties may have the right to activate a process, whereby one party has the right to make it first, this may be either to buy the real estate asset or to get access to the other party’s interest in the JV. However, the other party may look for some third-party buyer, but if a less or equal price is quoted, then the real estate asset or interest must be put on the market to the collaborator that made the offer at that partner’s previous offer price.
Deadlock provision for joint ventures, not only does it be helpful to avoid chaos, but provides a way out when the two parties are unable to agree on a major decision.
With all that said, right from the initial stage, the joint venture parties should take the time to analyze and make out their relevant roles in the JV. With a view to maximizing returns, all factors of the JV like nature and objectives, management structure, finance sourcing, risk allotment should be identified in the most tax-efficient manner.
A disagreement in the real estate joint venture is very common; termination is not the only way out, as soon as incongruity shows up, both the parties should make an effort to sort it out because an understanding is easy to reach when there is a mutual cooperation. If still, things don’t seem to work out, then consider parting amicably.