It is common for real estate investors to work with other investors on joint ventures. This may include a full-time partner who you work with on every transaction or individuals that you bring in on certain deals but not on others. For some investors, his or her partners may be different for each transaction.
On this page, we are referring to “partners” or “joint ventures” as any transaction where two or more people work together without regard for the form of the legal entity. Moreover, the investor may work with one other partner or many through syndication. Regardless of the structure, there are many things to consider when working with partners.
Documenting the Terms of the Agreement
No matter how many times you have worked with someone before, it is important that you document the terms of the agreement. This means the basic items like who pays for what and how proceeds are shared, but also things such as what actions can one person take without the other. I know that this might seem like overkill when working with someone for many years, but there are many disputes that arise between family members or lifelong friends and business partners. People change and circumstances change. Maybe the other party has a child with a serious illness, and thus, begins taking money from the company — something he or she never would have done previously. Or what if you end up disagreeing on how to proceed with your business. There is an old adage that says, you hire a lawyer for the divorce and not the marriage, which means you don’t draft a contract for when things go well, but for when things go as you never could have expected. It is always advisable that you obtain an attorney to help you draft detailed and customized contracts for each and ever joint venture you participate in.
Another important thing to think about when working with partners is making sure that if something goes wrong in that partnership that it doesn’t spread to your other projects or assets. Moreover, you want to make sure that even if everything is right, the creditors of your partner can’t take your company assets or step in with voting rights in your business. Take for example, the scenario above. Your partner’s child suffers from a serious medical condition and the medical bills are staggering. The partner does everything he or she can do to pay them, but just can’t keep up. The medical provider then obtains a judgment against the partner and you receive a letter saying the medical provider is now your partner. You can avoid this with careful entity formation on the front end.
Another risk to work with partners — and especially when you are soliciting money from others — is to not create a security which is required to be registered with the Securities and Exchange Commission (SEC). This is an often overlooked concern but one that can have serious consequences. For this reason it is important to have an attorney who is experienced in working with real estate transactions available to answer your questions.
Address On-Going Concerns
Finally, it is recommended that all investors who are going to engage in joint ventures have an attorney-on-call to answer questions that arise for your interests. This is because nothing can undermine a joint venture faster than a law suit or threat of litigation. Making sure that you are doing everything right can help lessen the chance of litigation and ensure the long term success of your joint venture.