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Real Estate Seminar > 06_Joint Venture > Flashcards

06_Joint Venture Flashcards

1
Q

Joint Venture Agreement

A
  • specify capital contributions
  • rights
  • duties and
  • profit sharing
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2
Q

Joint Venture

A
  • formed by at least 2 parties with the intent of achieving a specific investment objective
  • participants may include individual investors, partnerships, corporations or trusts
  • joint venture isn’t a legal form
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3
Q

Parties in Joint Venture

A
  • Manager
  • Investor
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4
Q

Manager as party in Joint Venture

A

[Sponsor / Principle / Entrepreneurial partner / general partner]

  • developer of the asset
  • the party that raises a fund
  • looking for capital for investment ideals
  • real estate funds, REITs, individual real estate managers
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5
Q

Investor as Party in Joint Venture

A

[Money partner / limited partner]
- invests in transactions
- invests in funds
- looking for investment vehicles such as development, income-producing properties acquisition
- wealthy people, pension funds, investment funds who wants to invest in real estate

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6
Q

Reasons for Joint Venture

A
  • Risk sharing
  • Combining expertise with capital
  • speculative objectives
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7
Q

Features of Joint Venture

A
  • specific purpose
  • limited duration
  • partners
  • profit / loss sharing agreed ratio
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8
Q

Structure of Joint Venture
General Partner + LP

A

General Partner: REITs, Real estate Funds, Real estate managers

LImited Partners (Investors):
- public pension funds, corporate pension funds, insurance companies
- high net-worth individuals, family offices, endowments, foundations, fund-of-funds, sovereign welath fund etc.

** Ownership of the Limited Partnership**
- General Partner + Limited Partners
- Limited Partnership owns proeprties (Investment Projects)

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9
Q

Structure of Joint Venture
Managers and Investors/Members

A

Managers: REITs, Real estate funds, Real estate managers

Investors/Members
- public pension funds, corporate pension funds, insurance companies
- high-net worth individuals, family offices, endowments, foundations, fund-of-funds, sovereign wealth fund etc.

Ownership of properties under Special Purpose Entities (SPE) or Limited Liability Company (JV LLC)

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10
Q

Forms of Corporation

A
  1. Sole proprietorship
  2. **Partnereship (Limited liability partnership)
  3. Corporations: Limited Liability company (GmbH) and Public company**
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11
Q

Sole proprietorship

Form of Corporation

Einzelunternehmer

A
  • owned and run by one person, unlimited liability
  • no corporation tax
  • only personal income tax
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12
Q

Partnership

Form of Corporation

A
  • owned and run by 2+ persons
  • unlimited liability (sponsor)
  • limited liability (Money partner)
  • no corporation tax
  • only personal income tax
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13
Q

Limited LIability Company (GmbH)

Form of Corporation

A
  • owned by many entities
  • each has limited liability but has right to manage the company
  • owners are double-taxed: Corporation tax + income tax
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14
Q

Public Company

Form of Corporation

A
  • owned by shareholders
  • but managed bu board of directors and CEO etc.
  • limited liability
  • shareholders have voting right but no management right
  • shareholders are double taxed: Corporation tax + income tax
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15
Q

Structure of
Single/Special Purpose entities (SPE) / Limited Liability Company (LLC)

A
  • limited liability
  • multiple owners
  • pass through of taxes (depends on local regulation)
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16
Q

Structure of Limited Partnership (LP)

A
  • sponsor/develor/owner = General Partner / Managing member (GP) (full liability)
  • Investors = LImited Partners (LPs) (Limited liability)
  • multiple owners
  • pass-through of taxes
17
Q

To enable the project
Manager provides

A
  • transaction sourcing
  • Capital (minority share)
  • **day to day execution **
18
Q

Enabling the Project
Investors provides

A
  • Capital (majority share)
  • periodic strategic input (not always)
19
Q

Risk exposure of the Manager

A

1. Financial (minority, yet significant to manager)
- front-and acquisition/development funds
- construction budget shortfalls (shared pro-rata)
- Operating deficit (shared pro-rata)

2. Personal recourse guarantee to lenders (partial or full)
- pledge personal assets as collateral against a loan including:
- acquisition loan guarantee
- construction completion guarantee

3. Reputation

20
Q

Risk Exposure Investor

A
  1. Financial (majority, significant to investor)
    - construction budget shortfalls
    - operating deficit
  2. Sometimes Recourse
    - e.g. shared with manager
  3. Reputational
    - via association with manager
21
Q

No “Formula” to successful joint venture agreements

A
  • **no typical structure **across property types, geographies, transaction types and partnerships investing in real estate
  • negotiation-specific
  • all revolve around end goal: txs to reach financial potential despite all risks, present and future
22
Q

Incentive-compatible Agreement

How to properly incentivize the sponsor?

A

Financial Risk and Financial Reward
- 90% Investors / same or 70%
- 10% Sponsor / same or 30%

So that everyone is a winner

23
Q

Promote Mechanics
Multiple Hurdle Rates
in promote waterfalls

Purpose

A
  • JV usually equal equity stake
  • however in real estate investor holds majority of stake whereas sponsor only holds small equity stake
  • promote waterfalls incentivize sponsor to align objectives with investor and to yield higher returns than preferred
24
Q

Sharing Cash Flow

in conext of reversion cash flow

A

In general, reversion cash flow (after repayment of debt) are distribuetd (pro rata pari passu with promtoe)

  1. IRR preference
    - money partner receives a speicifed IRR (Preferred Return) and the rest CF is split between money partner and manager
  2. IRR lookback
    - money partner receives a specified IRR (Preferred Return) and rest CF is distributed to manager
  3. Multiple Hurdle Rates
    - promote waterfalls
25
Q

Distribution Waterfall

A
  • method by which capital gained by fund is allocated between managers and investors is distributed
  • general rule: Pro-rata Pari-passu hurdle and promote

Waterfalls usually consists of the following phases:
- Return of capital (investor’s and managers capital)
- preferred return (Investor’s preferred return)
- catchup (Manager’s return)
- carried interest (Manager’s interest)

26
Q

Return of Capital

Distribution Waterfall

A

1st tier is structured so 100% of distributions go to investors until they recover all of their initial capital contributions

27
Q

Preferred Return

Distribution Waterfall

A

2nd Tier is structured so 100% of further distributions go to investors until they receive the preferred return on their investment

28
Q

Catchup

Distribution Waterfall

A

**3rd tier, the catch-up tranche, **is structure so 100% of the distributions go to the manager of the fund until it receives a certain % of profits

29
Q

Carried Interest

Distribution Waterfall

A

4th tier is structured so the manager receives a stated % of distributions as carried interest (promote)

30
Q

Joint Venture
vs
Mortgage

1. Rule of Cash Distribution
2. Method of Cash Distribution
3. Tax Benefits
4. Priority of Claims in Foreclosure

A

1. Rule of Cash Distribution
- Pro Rata pari passu with promote
- Scheduled Return

2. Method of Cash Distribution
- IRR reference, IRR lookback, Waterfall distribution
- only interest payment + Principal, no principal appreciation

3. Tax Benefits
- no tax benefits
- tax benefits

4. Priority of Claims in Foreclosure
- lowest
- highest

31
Q

Joint Venture (Syndication)
vs.
Mortgage
1. Category
2. Participants
3. Roles
4. Exits
5. Term

A

1. Category
- equity vs
- senior debt, junior debt

2. Participants
- Manager/general partner/sponsor/entrepreneur partner and investor/limited partner/money partner
- Borrower and Lender

3. Roels
- real estate managers and passive real estate investors vs.
- real estate managers and lenders

4. Exits
- sell property
- at maturity, usually, sell property

4. Term
- the whole life of the project
- long-term or short-term; For CRE, typically 7 years for a permanent loan, and typically less than 5 years for construction loan

32
Q

Joint Venture
vs.
Mortgage

1. Amortization
2. LTV
3. Expected return

CRE = commercial real estate

A

1. Amortization
- none
- For CRE, usually partially amortization loan

2. LTV
- none as equity
- typically up to 75%

3. Expected Return
- highest
- lowest, typically 4 - 10%

Real Estate Seminar (9 decks)

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