A significant portion of individuals lack the financial resources to fund large-scale commercial property transactions independently. However, joint venture equity offers a solution when such an investment opportunity arises, and we can only afford a fraction of the cost.
Joint venture equity, commonly referred to as JV or common equity, is the infusion of funds into a commercial property deal to fill in the financial gap that lenders are unwilling to back, often beyond 70-75% of the property’s value.
Consider the scenario where an ambitious property developer has the capital to buy a promising plot of land but not enough to construct the planned development. By partnering with a commercial real estate firm, the developer can link up with a sponsor or investor, like a private equity or family office, to create a joint venture where each party has a distinct role — the developer as the ‘operating partner’ and the investor as the ‘limited partner’.
Joint ventures vary, and no two are identical. The invested funds from all parties constitute the joint venture equity.
Preferred equity is another concept in the financial structure of commercial real estate, sitting above JV equity in the capital stack but below senior debt, usually returning 9-13%. Preferred equity is less risky than JV equity because it holds a higher claim on the property’s earnings.
There are several advantages to JV equity, including the potential for high returns, the opportunity to earn management and developer fees, and the chance to build business relationships and scale operations. It’s particularly beneficial for general partners seeking leverage, allowing them to embark on large projects with minimal initial investment.
However, JV equity isn’t without risks, and there may be scenarios where a different equity position could be more suitable, particularly for limited partners seeking to mitigate risks.
Effective practices in joint venture equity involve securing professional guidance, establishing a credible track record, meticulous organization, clear payment timelines, choosing the right business structure, transparent exit strategies, and well-defined partner roles to ensure a successful partnership.
Ultimately, JV equity is a compelling choice for financing substantial commercial real estate endeavors, favoring the operating partner with its structure of returns and costs. Still, the success of such partnerships hinges on careful planning and collaboration between all involved parties.