Instruction by Bruce Kirsch Principal, Real Estate Financial Modeling Copyright © 2009 Real Estate Financial Modeling, LLC. All Rights Reserved. Real Estate Financial Modeling’s Joint Venture Partnerships Basics www.GetREFM.c om
Real Estate Joint Venture Partnerships Basics
Jun 13, 2015
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Instruction by Bruce KirschPrincipal, Real Estate Financial Modeling
Copyright © 2009 Real Estate Financial Modeling, LLC. All Rights Reserved.
Real Estate Financial Modeling’s
Joint Venture Partnerships Basics
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Overview
2
• Rationale for partnering – one-off transactions and investment funds
• Legal structuring
• Risks and rewards
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Definitions
3
Principal = Sponsor
Owner of the assetDeveloper of the asset
The party that raises a fund
Investor
Invests in the transactionInvests in the fund
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Why One Seeks A Joint Venture Partner
4
• As the Sponsor (Owner/Developer), you need:• Capital• Better access to lenders• Sellers to believe that you will close• Better third party provider pricing• Strategic and technical expertise
• As the Investor, you need an investment vehicle:• Developments• Existing income-producing properties• Mortgage Notes
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Real Estate Investment Partnerships Overview
5
• Single Transactions - Single/Special Purpose Entities – Limited Liability Company (LLC)• Ease and low-cost of formation• Multiple owners• Pass-through of taxes
• Multiple Transaction Funds - Limited Partnership (LP)• Fund Members:
• Sponsor/Developer/Owner = General Partner/Managing Member (“GP”)
• Investors = Limited Partners (“LPs”)
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
6
One Way To View Joint Venture Partnerships
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
7
• Multiple parties are necessary; neither alone are sufficient
• Sponsor (LLC, or fund’s GP) provides:• Transaction Sourcing (identifies the destination)• Capital (minority share) (secures right to fly the plane)• Day-to-day Execution (safe piloting and landing of the
plane)
• Investor (LP) provides:• Capital (majority share) (provider of plane, and fuel)• Periodic Strategic Input (Air Traffic Control)
Enabling The Transaction
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Work Performed and Value Created
8
• Who is doing more work, and presumably, adding more value?
• Sponsor:• Allocated overhead to find and secure the
transaction; took entitlement risk and• Day-to-day Execution – Thousands of decisions, Tens
of thousands of person-hours over multiple years
• Investor:• Capital provider – 1 decision (invest/not invest)• Periodic Strategic Input - hundreds of person-hours
over multiple years
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Risk Exposure - Sponsor
9www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Risk Exposure - Investor
10
• What risks are they taking, and in what proportion?
• Investor:• Financial (majority, and significant to Investor)• Sometimes Recourse (e.g., pro-rata with Sponsor)• Reputational (via association with Sponsor)
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Types of Financial Risk
11
• Front-end acquisition/development funds
• Construction budget shortfalls (shared pro-rata?)
• Operating deficits (shared pro-rata?)
• Recourse Guaranties
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Rewards
12
• In what proportion are the Sponsor and Investor seeking rewards for the various risks they bear and the various roles they play?
• How can cash flow splits be commensurate with both risk taken and value added?
• How is it typically structured?
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
No “Formula”
13
• Unfortunately, there is no typical structure across property types, geographies, transaction types and the hundreds of thousands of partnerships investing in real estate
• Negotiation-specific
• All revolve around the end goal
www.GetREFM.com
CLICK TO EDIT MASTER TITLE STYLE
Optimal Structuring to Achieve the Goal
14
• Goal: for the transaction to reach its financial potential despite all risks, present and future
• Execution requirements to achieve goal:• Top performance by Sponsor• Sound input from Investor
www.GetREFM.com
Related Documents
