Startup Joint VenturesOn a number of occasions, we have been asked to draft a partnership agreement for a real estate venture. The typical setup is one party, who we’ll call the “Investor Party”, invests the capital necessary to build or renovate a property with another party, who we’ll call the “Developer Party”, who has the expertise to manage the construction or renovation (and may even be a licensed general contractor).

A lot of the variables in this type of arrangement hinge on how “silent” a partner the Investor Party wants to be. Sometimes the Investor Party trusts the Developer Party and simply wants to invest money in the project and allow the Developer Party to manage all the details, from property acquisition to the sale of the property. Other times, the Investor Party wants to have input on key components of the venture, such as the nature of the design, timeline for completion and ultimate sale price for the property.

In one instance, we negotiated and drafted a joint venture agreement on behalf of an Investor Party to not only ensure the Investor Party’s involvement with those elements noted above, but also to protect against the possibility of the Developer Party selling the property without returning the Investor Party’s initial investment and/or return on investment. To accomplish this, we drafted the agreement so that the Developer Party was in charge of all the construction aspects of the project, including drawing up plans, hiring workers, and obtaining all needed permits and materials, while the Investor Party managed the entire marketing and sale process, including receiving the sale proceeds directly. This allowed our client, the Investor Party, to maintain discretion over the negotiation with potential buyers and ultimate sale price, and be responsible for disbursing the sale proceeds to both parties in accordance with the joint venture agreement. We also made sure to vest title in the Investor Party’s name to avoid any prospect that the Developer Party would sell the property before the Investor Party could complete a sale.

An alternative to the joint venture approach outlined above is for the Investor Party and Developer Party to form an entity, such as a corporation or limited liability company (LLC), for the project. Forming a company allows the parties to shift liability completely from themselves as individuals to the new entity, while simultaneously creating a vehicle to hold title and address management considerations. As the parties would jointly own the company, there would not be the same risk of selling the property without the other party’s consent or knowledge, or withholding proceeds without violating a fiduciary duty to the company. Additionally, all decisions related to the project, including timelines and sale price, may be made by the unanimous or majority vote of the owners of the company, per a shareholder agreement (corporation) or operating agreement (LLC).

To learn more about real estate joint venture agreements and how Your Contract Lawyer might be able to assist you, please contact us via phone or the contact form on this page.

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