Brooks Holstein is the founder and Managing Member of COMVEST Properties, LLC and its affliate, LifeCare Properties, LLC.
Real estate development happens when there is a lack of viable alternatives to meet existing or future supply demands for a specific type of commercial property or class of property in a defined market. Having accurate market data and real estate sector information is the basis for correctly identifying a unique opportunity and successfully bringing a project to market. This is especially true when foresight, due diligence and hard work result in success. Although the measurement of success is relative, the feeling of meeting or exceeding your partners’ and investors’ goals and objectives is incomparable.
In my experience as the founder of a commercial real estate and investment firm, developers often have a tendency to explain away a project’s return standard deviation from these most commonly used measures of risk for property investments. In Market Analysis for Real Estate, author Rena Mourouzi-Sivitanidou explained that the standard deviation of returns could measure the volatility of the performance of an investment. It can compare the risk associated with two property investments.
Investors, lenders and other vested parties are relying on project proformas to make informed investment decisions and must have confidence that the general partner has integrity and is providing achievable results.
Like most personal and professional relationships, joint venture partnerships are founded on honesty, transparency and integrity. Without these key virtues, relationships are destined to fail, and the only aspect to pin certainty on is when. If your relationship with a potential partner lacks a solid foundation, the project is going to be time-consuming, difficult to execute, emotionally challenging and have the potential for legal disputes.
In this post, I’ll share valuable tips to help you identify and cultivate successful joint venture partnerships.
Make your partnerships worthwhile.
Mutually beneficial partnerships identify and combine the strengths of involved parties and take steps to ensure a favorable outcome. With any project offering, general partners must weigh a project’s market demand, development risk, construction timelines, investment horizon, exit strategy and proforma returns. Conversely, you wouldn’t want to enter investment partnerships where there are disparate investment criteria, risk tolerance and unrealistic return expectations.
Commercial real estate development is inherently risky. From a capital engineering standpoint, the general partners must be confident of their development team’s and consultant’s ability to execute meticulous development plans and critical task timelines. Whether you’re securing the capital or equity you need or competitive debt facilities, transparency and aligned interests increase the project’s chances of success.
Finance your projects properly.
Throughout the operating agreement contract negotiation process, it’s paramount to make sure all development risks and projected proforma returns are communicated to investors. Partnerships and banking relationships are built on trust and a proven track record of project success. They can also provide substantial access to construction financing under competitive rates and terms, thus creating substantial economic value and credibility as the project managing general partner. Developing a realistic construction budget and project timeline, with focused attention to every expense line item, instills confidence in lenders and capital partners.
Through consultations with attorneys and banking partners, you can draft contracts where each party’s interests are considered. This entails balanced operating agreements, conservative estimates on expenses and revenue and higher project Internal Rates of Return.
Lead with honesty and integrity.
Honesty and integrity are essential to ensuring partnerships are prudently underwritten and financially achievable. These foundational attributes are often glossed over and occasionally omitted completely in projects offering memorandums. After all, your company’s culture and the value your team brings to projects are only as successful as your partnerships.
Remember that transparency makes all the difference.
Employees today want to work for a company with ethical business practices. This is important to keep in when navigating a partnership as well. Full and open disclosure allows for transparency and significantly reduces the possibility of project performance disappointments and conflicts. Minor setbacks can be almost guaranteed due to major disruptions in the supply chain and skilled labor market; withheld information cannot. When boiled down, I believe this is the morally correct approach. This strategy helps my business, for example, to flourish as our actions, knowledge and talent strengthen the relationships with our equity partners.
When parallel interests and large amounts of capital are involved, exceptionally trained and motivated team members who produce positive development profits and meet or exceed project proforma ROIs yield optimum results for all parties. Openly admit when you’ve made mistakes; learning from them and putting processes in place to mitigate them speaks volumes.
Actively establish and cultivate strong partnerships.
Cultivating and maintaining strong partnerships must always be top of mind. Whether through communicating with existing partners or identifying potential partners with shared business cultures, it’s crucial to maintain goodwill and equal standing. This takes time, but great things come to those who exercise patience.
For example, my company’s investment partners have done an outstanding job of remaining open and collaborative. Throughout the operating agreement contract process, we communicate all development risks to investors, regardless of the duration. When it came to establishing the initial connection with one of our closest partners, it took roughly eight months to draft and agree to mutually beneficial terms. It was well worth the wait.
With a goal of providing development services that are fair and create positive economic value, implementing these strategies allows your organization and partners to flourish. I’ve found this success will often be reflected back to increase growth, access to more equity and increased debt limits. Your organization and the number of partners and investors who want to collaborate with you might even increase in number and investment capacity. If you appropriately incorporate these tips and strategies into your everyday operations, you can achieve levels of success, camaraderie and fulfillment you never thought possible.