Entering a Joint Venture
|by Steve Gold, Managing Director, Hotel Financial Strategies
June 2005 - Here are some of the issues that we are facing in the creation of J.V’s we are presently doing:
1. Will the investor cover all costs, including construction and occupancy cost overruns?
2. Does the investor require a guaranteed or a preferred return?
3. What are the sharing arrangements for?
a. Cash flow4. When will funds be contributed?
a. At land acquisition5. Who controls the investment?
a. Construction decisions6. Does the developer obtain a capital account?
7. Is there an “earn out” formula?
a. Time allocation.8. Will the investor guarantee construction loan?
9. Will the investor fund all cost or only the “equity gap?”
10. What guarantees are there relative to future funding obligations by the investor?
11. Can the transaction be unwound?
a. Failure to obtain building permit, failure to complete, or obtain financing12. What is the form of additional contributions?
a. Loan from investor13. Does the developer obtain capital account for hard equity investment?
a. What if developer covers cost overruns?
a. Adequate notice to developer to allow time to obtain new financing.15. What is the joint venture experience of the investor?
a. Discussions with prior developer partner.16. What is the developer’s I.R.R. if he does the joint venture keeping 100 percent?
17. Is there a 100 percent squeeze-out formula?
a. Can minimum interest be preserved by developer?18. Is the investor prepared to take on formula construction phases of the project?
19. What is the “blended interest rate” on the joint venture capital investment?
a. What is the true cost of money?20. Will the early joint venture conflict with the developer’s future ability to optimize position?
21. Does the accrued return effectively increase the investor’s position?
a. Does the accrued return bear interest?22. Is the asset holding period compatible with developers?
a. Can the developer sell its interest before the sale of the property?23. What is the formula for the release of any cash set aside to cover F.F. & E. improvements, marketing costs, completion of construction and negative cash flow?
a. Use of letters of credit or cash.24. Is there a right to obtain a modification of the sharing of cash flow or of sale proceeds after the investor receives a prescribed return?
a. 72 – 25 modified to 50 – 50.25. Will the joint venture trigger a taxable event?
a. Short term gain.26. Will the investor enter existing partnership?
27. Will the investor assume existing project liabilities?
28. Will the investor recognize a land profit or developer fee?
a. Cash payment vs. capital account.29. Will the investor pay for 100 percent of tax losses?
a. Conversely, will the investor allocate tax losses in exchange for lower price or higher yield?30. Will the investor give 100 percent of cash flow to the developer for two years in exchange for 100 percent of tax losses?
31. Who controls partnership funds?
a. Construction loan.32. Does the investor have continuing financial ability to cover deficits after breakeven?
a. What if a major decline occurs in future years?33. If the investor controls the transaction, is the developer a general or limited partner relative to future partnership liabilities?
34. Does the developer guarantee breakeven?
a. What if protections aren’t met?35. What is the scope of required reporting to the investor?
36. What is the right of the developer to build and manage a competitive project?
37. Is a monthly reserve account required?
38. What is the investor’s I.R.R., immediate cash return and tax loss objectives?
39. When do the investor’s funds go “at risk?”
40. Will investor funds help save the construction period interest cost?
41. Does the investor require an appraisal before funding?
42. Will the developer’s subordinate management fee in order to qualify for a permanent loan?
43. If a permanent loan is obtained, what if ceiling funding is not attained?
a. Use of wrap note to developer?44. Is the investor contact person experienced?
a. Years with investor.45. What reps and warrantees will the investor require?
46. Will the investor perform like a partner or lender?
47. Is the investor governed by a committee?
a. Decision making machinery.48. Will the investor want to manage the property?
a. Risk of capital calls.49. Does the developer obtain a cumulative or non-cumulative return?
50. Is another financing vehicle available?
a. Participating mortgage.
Steve is Chairman of Hotel Financial Strategies and was previously Chairman of Center Financial in Los Angeles.
Mr. Gold has an MBA from UCLA. He specializes in the financing of major real estate developments. He also originates many joint ventures for developers with institutional partners and is actively involved in consulting with major institutions throughout the United States. Responsible for the development of debt and equity programs for HFS, he has been involved in over $20 billion in real estate financing.
Mr. Gold is an author of note and writes regularly for various real estate publications; has appeared on national television; is an active guest speaker for major universities; and has lectured throughout the United States, Canada and Western Europe. Mr. Gold has chaired and appeared at over 800 real estate conferences and seminars. His frequent appearances before major real estate organizations have won him recognition as an outstanding authority in real estate investment and financing.
Mr. Gold was a Director of a major public R.E.I.T. He has been the Chairman of the Real Estate Advisory Board at UCLA, Founder of the UCLA Hotel Conference, and a member of the Dean's Council of the UCLA School of Architecture and Urban Planning. He is listed in Who's Who in Real Estate, a director of numerous civic and charitable organizations, and was the recent chair of the Executive Committee of the Anti-Defamation League.
|Also See:||Hotel Financial Strategies Closes Seven Hotel Loans Totaling $109,000,000.00 / April 2005|
|Hotel Financial Strategies Arranges $41.5 Million Financing for Westin Hotel / October 2004|