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The risks associated with a joint venture

On Behalf of | Apr 27, 2021 | Uncategorized |

Los Angeles is an ever-changing city. New businesses will come in and more buildings will be constructed. In many causes, a property owner will team up with a developer, creating a joint venture. This can be a very successful partnership; however, this is dependent on the terms of the agreement and the ultimate goal of the project. In some cases, this can be a very complex and high-risk venture, making it vital to fully understand the venture in its entirety and what rights one has when issues occur.

Entering a joint venture

A joint venture may seem like a great opportunity, and it can be. Nonetheless, there are risks to a property owner in these ventures, even when a well known and successful developer is a party to it. In simple terms, a joint venture is when a property owner and a developer team up. Together, they form a limited liability company or LLC to develop a project. This means that the property owner contributed their land to the venture while the developer typically contributes their expertise and sometimes money as well.

When a mortgage loan is sought for the project, the joint venture will have to put up its property, which includes the land of the property owner, as collateral. In these matters, it is often easier for the developer to find financing, as they didn’t have to pay acquisition costs; however, this means much risk is placed in the hands of the property owner.

Risks of a joint venture

When the project goes well, it is often the property owner that will make out, making more money through the outright sale of the land. In contrast, if the project fails, the lender for the project will likely foreclose. This means that the joint venture will lose everything it owns, including the project and the land put up for collateral.

There are options to reduce these high risks for property owners. One option is to structure the joint venture agreement so that if the developer fails, he or she will lose their interest in the joint venture. However, the landowner will remain while a new developer steps in. This can be a difficult term to negotiate but it is possible.

Entering a joint venture can be a very lucrative business opportunity; however, it is also when that comes with risks and complex real estate law issues. Thus, it is important to fully understand the agreements in place and what options are available if the agreement is breached or a issue makes the venture impossible to continue.