If you've been in the real estate business for awhile now, the chances are extremely high that you've entered a Joint Venture Agreement at least once.
Right after the recession hit, Joint Venture Agreements became all the rage. Mainly because lenders began imposing loan-to-value ratios as high as 70%. Not many real estate investors are willing to put that much on the line, not by themselves anyway!
But maybe you don't know what a Joint Venture Agreement is? Whether you do or don't this article might can teach you something new. Let's begin.
A JV Agreement is a contract between two or more parties. It outlines who is providing what. (Money, services, credit, etc.). It also outlines what the parties responsibility and authority are, how decisions will be made, how profits/losses are to be shared, and other venture-specific terms.
A joint venture agreement is typically used by companies or individuals (like real estate investors) who are entering into a onetime project, investment, or business opportunity.
Usually the two parties will form a new company such as an LLC to conduct operations or to own the investment. This is usually the recommended path if the parties intend to cooperate over the long term.
However, if the opportunity between the parties is a one-time venture where the parties intend to cease working together once the agreement or deal is completed, a joint venture agreement may be an excellent option.
For example, consider a common joint venture agreement scenario used by real estate investors, and let's say you're the real estate investor. You purchase a property in your LLC or s-corporation and intend to rehab and then sell the property for a profit.
Then you, the real estate investor, finds a contractor to conduct the rehab. Your arrangement with the contractor is that the contractor will be reimbursed their expenses and costs and is then paid a share of the profits from the sale of the property following the rehab.
In this scenario, the joint venture agreement works well as both you and the contractor can outline the responsibilities and how profits/losses will be shared following the sale of the property.
It is possible to have the contractor added to your s-corporation or LLC in order to share in profits. But that could be bad for you.
If you did add the contractor to your s-corporation or LLC, that contractor would permanently be an owner of your company. Which is bad because you will likely use that company for other properties and investments where the contractor is not involved.
As a result, a JV Agreement between your company that owns the property and the contractors construction company that will complete the construction work is preferred.
A JV agreement lets each party keep control and ownership of their own company while they divide profits and responsibility on the project being completed together.
While a new company is not required when entering into a joint venture agreement, many joint venture Agreements benefit from having a joint venture-specific LLC that is created just for the purpose of the joint venture agreement.
This venture-specific LLC is great in situations such as:
A $1M deal or venture could be done with a joint venture Agreement alone, however, you would be well advised to create a new entity as part of the JV Agreement. On the other hand, if the venture is only a matter of tens of thousands of dollars, the costs of a new entity may outweigh the benefits of a separate LLC for the venture.
Joint venture Agreements are great when you need cash now or can't qualify for financing. They also enable you to work with someone who can bring something to the table you can't. But in any case, always make sure you carefully consider everything before entering into one.
As always, if you have any questions about this article please do not hesitate to ask. If you're wondering whether a joint venture arrangement is right for you or have questions about setting up a venture-specific LLC, contact us today.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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