In IREI, Real Estate Attorneys Examine the Changing Marketplace for Real Estate Joint Ventures

In an article for International Real Estate Investor, real estate counsel Peter Scherer and associate Joseph Nania examine how, as the investment climate has evolved, institutional investors are exploring more integrated investment models. This trend is fueled both by institutional investors’ desire to improve alignment with their operating partners and capture a greater share of overall deal economics and deal flow.

“While most institutional investor experiments with alternative investment structures are driven by the same fundamental incentives, a broad variety of deal structures have emerged to account for the idiosyncratic motivations of individual capital partners and operating partners.”

“To ameliorate the perceived deficiencies in the traditional joint venture model, operating and capital partners have implemented several strategies for expanding the traditional joint venture relationship” which include offering additional support and services, including seconding employee, without tying services to specific investments; providing capital partners with a path beyond traditional joint ventures to participate in “GP economics” including the rights to invest in an operating partner’s co-investment vehicles or in future funds; and investing in management/development companies – ranging from purely passive minority investments to more substantial investments that include reporting and control rights.

“Direct investments by capital partners in the operating businesses of their operating partners expands the scope of the traditional joint venture partnership and creates a deeper alignment between capital and operating partners.” But, the article concludes, “During this period of market evolution, market participants would be wise to carefully consider the benefits and burdens of moving away from traditional structures. When two roads diverge, choosing the one more or less traveled may make all the difference, but the prudent choice may ultimately be clear only in hindsight.”