Real estate joint ventures are critical in navigating today’s volatile market, allowing stakeholders to pool resources and share risks. However, structuring these ventures requires careful planning to address challenges such as market fluctuations, financing difficulties and partner insolvency.
Below is an overview of essential considerations to ensure successful real estate joint ventures.
- Structuring Joint Ventures. Limited partnerships and co-ownership structures remain popular choices for their tax benefits and ability to achieve limited liability. These structures work best with robust reporting and oversight mechanisms, particularly for non-managing partners. To provide flexibility, tailored exit strategies such as put and call rights or being able to market a 100% property interest may be appropriate. Stricter controls on third-party financing terms are increasingly necessary to mitigate risks.
- Liquidity Rights. Liquidity provisions such as third-party transfer rights, buy-sell mechanisms and forced sale clauses are fundamental for resolving disputes and enabling smooth exits for joint venture entities. Buy-sell or “shotgun” clauses are particularly effective for addressing deadlocks but must be carefully crafted to be acceptable to all parties. Flexible liquidity options, including early-stage triggers, are important considerations for partners who want to adapt to uncertain or volatile market conditions.
- Financing Considerations. Separate mortgage rights allow individual co-owners to finance their interests independently, but these arrangements require safeguards such as loan caps and restrictions on undesirable transfers. Clear agreements on handling financial shortfalls are critical to managing risks. Without balanced risk-sharing mechanisms, joint and several guarantees can disproportionately burden wealthier partners.
- Partner Insolvency. Insolvency of a joint venture partner may be disruptive to a joint venture. For example, it can result in contractual remedies, such as put-call rights or replacement of managers, being stayed. In addition, other contractual provisions, such as transfer restrictions, may become unenforceable during insolvency proceedings. To mitigate these risks, joint ventures can adopt measures to maintain stability and minimize disruption.
- Purchasing Property in Insolvency. Parties purchasing assets subject to insolvency proceedings (including under the Companies’ Creditors Arrangement Act or a receivership) should be aware of a number of issues. These include compliance with a sales process, the involvement of a court officer, limitations placed on due diligence and/or representations and warranties in a purchase agreement, and the need for court approval.
