Across Africa, as we have established in a previous article, Joint Venture agreements are not only an increasingly popular way to develop real estate, they are also a great way to make money. Land owners who understand that developing their properties would lead to significantly higher returns, typically seek out partners to finance development. These partners may be individual private investors or corporate financial institutions or real estate development companies.
Real Estate Joint Ventures are usually a win-win for parties involved.
The question, though, is how do you actually find the right RE JV partner that will provide you with what you need? Having no partner at all is often better than dealing with the wrong partner.
If you are looking at the possibility of an RE JV, here are some key points worth considering.
In an RE JV, one of the first things to do when prospecting partners is to find out their track record and past performance. Great partners must have track record. Look out for metrics such as deal size, property type, geography, internal rate of return, and equity multiple. Partners must also understand the market and have the ability to correctly interpret data to predict trends.
One important question to ask would be “What does this partner bring to the table that is unique?” Why should I partner with this individual/corporation and not another individual/corporation? What are their unique resources and competencies that can be leveraged to create greater economic value?
Roles and Responsibilities
Understanding what each party does is important. What is even more important is putting down in writing in a document that can be referred to. This document helps clear up the potential for strife and a break down in relationship that may arise from ambiguities. When every party is clear as to their roles, duties and responsibilities, it provides indicators for judging performance.
At the early to mid stages of nearly all RE JVs, large negative cashflows are to be expected. It is therefore necessary to ascertain the partner’s ability to fulfil its financial commitments and generate the level of financial resources necessary for maintaining the venture. A partner’s financial constraint can quickly become a liability and throw a wrench in the works of an entire JV before it even has the chance to become profitable.
RE JVs, like all JVs, are not partnerships of perpetuity. At some point in time, every party would go their way. Properly planning for that eventuality is important. Investment strategy, horizon and all possible exit scenarios should be anticipated and clearly outlined. Mechanisms for triggering sale of the asset or buyout of a partner’s interest with methodology for determining fair value and resolving contingencies are key.
Real estate is a fairly solid store of capital, source of income generation and intelligent way to hedge against inflation. Investing in real estate, especially through a JV, can help you reap far bigger benefits than you may have on your own. Getting an RE JV right is therefore very important.