A JV is commonly defined as a combination of two or more parties (people or entities) that is formed to acquire or develop and own, lease, manage and sell one or more real estate assets. The JV typically has two categories of partners: the “operating partner” and one or more “capital partners.” JVs are frequently used by experienced real estate developers to obtain the capital they need for their projects.
The capital partner is typically a passive investor (again a person or an entity) who provides the bulk of the equity capital that the JV needs. In most cases, the capital partner is not involved in the JV’s day-to-day management or operations, although the capital partner is likely to insist on having approval or control rights over “major decisions.” The JV will typically raise about 20% to 50% of the total amount of the equity capital needed for the project and then obtain debt financing from a bank or other lender for the remaining capital needs.
As discussed below, the JV agreement details the specific initial financial contributions that each partner is required to provide. Further, the JV agreement should specify what happens when additional contributions are required and, in that regard, if the additional contributions are not made, how the ownership interests of the various participants will become diluted.
Republished with permission. This article, "Key Terms of Real Estate Joint Venture Agreements" was originally published by Bradley Arant Boult Cummings LLP on April 20, 2023, and republished in the October issue of ALI CLE's The Practical Lawyer on September 14, 2023.