Joint Ventures in Industrial Property Investing
Learn how joint ventures can impact the success of any industrial property investment and some best practices for organizing yours.
- What Are Joint Ventures in Industrial Real Estate?
- Ownership Structures for Industrial Properties
- What Elements Should a JV Agreement Have?
- Plans & Goals
- Separate Contributions
- Profit Splits & Management
- Long-Term Ownership
- Exit Strategy
- Contingencies
- What Fees Do Operating Member Get?
- Acquisition Fee
- Financing Fee
- Development Fee
- Leasing & Property Management Fees
- Asset Management Fee
- Disposition Fee
- Best Practices in Forming a Joint Venture
- 1. Choose Your Partners Carefully
- 2. Communicate Responsibilities
- 3. Be Aware of Conflicts of Interest
- Related Questions
- Get Financing
What Are Joint Ventures in Industrial Real Estate?
While a single investor owning 100% of an asset is very common, many commercial real estate assets — including larger industrial properties — can have more complicated ownership structures.
When multiple companies or individuals are involved in owning a property, they are typically structured as joint ventures, often referred to as JVs, where each party has a specific role. There are many situations where one partner brings significant real estate experience and the other provides practically all the capital for the investment or development, but often it is a blend between the two. Parties engaged in a joint venture are typically two or more high-net-worth individuals or companies. This is a bit different from syndication, which involves one sponsor and a larger group of investors.
Ownership Structures for Industrial Properties
Joint ventures are typically structured with one operating member — often an experienced investor, property manager, or developer — taking lead on the management of the asset. Capital members, on the other hand, generally have a less active role, though this can vary significantly.
The most common ownership structure for a joint venture is through a limited liability company, or LLC. Partnerships, corporations, and a number of other structures are also relatively common ways to structure industrial property ownership. Each option has significantly different mechanics, and so special care must be taken to ensure your JV ownership structure matches the dynamics of the people and organizations involved. For example, LLCs tend to put operating and capital members on more or less equal footing, while a limited partnership would reduce a capital partner’s control — and liability — in an investment.
What Elements Should a JV Agreement Have?
As a part of determining your industrial investment’s ownership structure, it is critical to draft and sign a joint venture agreement with all your partners. This document typically contains several important elements, outlined below.
Plans & Goals
This part of the agreement should detail the warehouse, manufacturing facility, or other industrial property that the venture plans to develop or acquire, and how this plan will be put into action.
Separate Contributions
Usually, a joint venture’s capital partners will provide most of the capital in an investment, with the operating partner contributing a smaller stake. In some situations, however, operating partners provide no capital at all. This section of the agreement generally also defines any financing that will be required.
Profit Splits & Management
The document should clearly state how profits will be allocated. In some situations, an operating partner will take a larger share of the profits due to additional responsibilities, like the management and upkeep of the investment. Often this larger share is structured as a waterfall, where the partner is awarded a larger share of the profits if the investment meets or exceeds specifically defined profitability hurdles.
Long-Term Ownership
The joint venture agreement should also clarify what happens after the primary investment period concludes with regard to ownership eligibility. This could include language specifying that a capital partner may have the right to buy an operating partner’s stake after a certain amount of time has elapsed.
Exit Strategy
This section should highlight the timeline for the opportunity to conclude, how divestment will occur, and how — or if — a partner can exit the agreement early.
Contingencies
Commercial real estate investment comes with its share of uncertainty and unforeseen events. These can easily reverse an investment’s upside or the viability of a development. Defining ways to reduce risk by having plans in place can play a critical role in minimizing the impact of natural disasters, lawsuits, and other similar events.
What Fees Do Operating Member Get?
Though operating partners often receive additional compensation through management agreements, most additionally receive fees as part of their work involved in overseeing operational aspects of an investment. These fees are varied and should be clearly defined in any agreement. Some examples can be found below, though not all will apply in every agreement.
Acquisition Fee
The operating member typically puts significant time, effort, and diligence into acquiring a property, and an acquisition fee is often in place to compensate for those efforts. This fee is usually set at 1% of the property’s purchase price.
Financing Fee
Like purchasing, financing an asset can also be incredibly time intensive, and to this end, operating members are occasionally compensated with a fee typically set at 1% of debt sourced for an investment or development. If a broker were used to source the financing, this fee would likely be significantly reduced — or eliminated completely.
Development Fee
Particularly in development projects as well as value-add investments with significant capital improvements, operating members often take a fee of between 3% and 4% of construction costs to compensate them for monitoring and managing these processes.
Leasing & Property Management Fees
While leasing and property management services are frequently handled by an affiliate of an operating member instead of the member itself, the costs associated with these activities can be considered additional fees for services provided.
Asset Management Fee
This fee compensates an operating partner for overseeing and directing the financial strategy of an investment. This is usually set at 1% of equity invested, paid annually during the investment term.
Disposition Fee
Similar to the acquisition fee, this is paid to the operating partner for its involvement in managing the disposition of a property.
Best Practices in Forming a Joint Venture
Using a joint venture in an industrial acquisition or development can be beneficial, but there are some risks involved. Planning is essential to ensure all partners are able to maximize investment upside while reducing liabilities. We have outlined three best practices for working in a joint venture ownership structure.
1. Choose Your Partners Carefully
While a great partner can maximize an investment’s profitability, the wrong one can sink it. All partners in a joint venture need to be in lock step regarding business practices, ethics, risk tolerance, timelines, and many other critical aspects. Beyond this, finding a partner with a strong track record can be key in determining your investment’s success.
2. Communicate Responsibilities
Even outside of the joint venture agreement, it is crucial to communicate with your partners to ensure everyone is on the same page about responsibilities for your warehouse, distribution center, or any other type of commercial real estate investment. Delegation is a key element of smooth operations, so take care to minimize misunderstandings or potential issues — if possible, before they occur.
3. Be Aware of Conflicts of Interest
This is especially true when an operating member of a joint venture uses an affiliate as a general contractor or property management company. Handling these aspects of a development or investment in-house may be the best way to minimize expenses, but take care that conflicting priorities are handled. For example, a property management company would not generally benefit from the sale of an asset, even if that same disposition would benefit the joint venture.
Related Questions
What are the advantages of joint ventures in industrial property investing?
Joint ventures in industrial property investing can offer a number of advantages, including:
- Access to capital: By partnering with a capital partner, the operating partner can access the capital needed to purchase and develop the property.
- Reduced risk: By splitting the risk between two or more parties, the risk of the project is reduced.
- Expertise: The operating partner can bring their expertise to the project, which can help ensure that the project is successful.
- Tax benefits: Depending on the structure of the joint venture, the partners may be able to take advantage of certain tax benefits.
For more information, please see this article.
What are the risks associated with joint ventures in industrial property investing?
Joint ventures in industrial property investing can be risky if proper planning is not done. Without proper planning, a joint venture can easily be a sand-trap, in which one (or both) parties can lose valuable investment capital and even expose themselves to serious liability. Potential risks include:
- Choosing the wrong partner can sink a joint venture, while choosing the right one can help it skyrocket to success.
- Misunderstandings can occur if responsibilities are not delegated carefully.
- Conflicts of interest can arise if affiliated companies are involved in the joint venture.
To try to ensure that your joint venture partnership goes off without a hitch, you may want to consider following some of the best practices listed on Commercial Real Estate Loans and Apartment Loans.
What are the legal considerations for joint ventures in industrial property investing?
When it comes to joint ventures in industrial property investing, there are several legal considerations that need to be taken into account. First, it is important to have a detailed joint venture agreement that outlines the plans and goals of the venture, how much each party will contribute, profit splits/management responsibilities, long-term ownership rights, exit strategies, and contingencies. Additionally, it is important to be careful when selecting a partner, delegate responsibilities carefully, and be aware of potential conflicts of interest.
For more information, please see the following sources:
What are the tax implications of joint ventures in industrial property investing?
The tax implications of joint ventures in industrial property investing depend on the structure of the joint venture and the local tax laws. Generally, the profits from the joint venture will be taxed as income, and the partners may be subject to capital gains taxes when they sell their stake in the venture. Additionally, the property itself may be subject to property taxes, which can vary widely across a target market. To find out what kind of taxation to expect, potential investors should check with the municipality's assessment office or talk to the business owners and homeowners in the target community.
What are the best strategies for structuring joint ventures in industrial property investing?
When structuring a joint venture for industrial property investing, it is important to consider the following best practices:
- Be careful when selecting a partner. Choose a partner who is on the same page with you regarding ethical business practices, risk tolerance, timeliness, and other important factors. Make sure they have the operational experience, manpower, and capital to get the job done.
- Delegate responsibilities carefully. Have a frank discussion with potential partners about who will do what and when. This will help to avoid misunderstandings.
- Be careful about conflicts of interest. Stay aware of potential conflicts to make sure they don’t cause any serious issues. It is usually best to keep affiliated companies out of JV dealings to prevent potential conflict between members.
For more information, please see the following sources:
What are the most common mistakes to avoid when forming joint ventures in industrial property investing?
When forming joint ventures in industrial property investing, it is important to be aware of potential mistakes that could lead to costly consequences. Here are some of the most common mistakes to avoid:
- Not Choosing the Right Partner: It is essential to make sure that both partners are on the same page involving ethical business practices, risk tolerance, timeliness, and other important factors. Additionally, make sure that a potential partner (or firm) has the operational experience, manpower, and capital to get the job done. Source
- Not Delegating Responsibilities Carefully: It is important to have a frank discussion with potential partners about who will do what and when. That way, there will be significantly fewer misunderstandings if you actually end up working together. Source
- Not Being Careful About Conflicts of Interest: It is usually best to keep affiliated companies out of JV dealings to prevent potential conflict between members born from issues involving these affiliated entities. Source