Last month we discussed how to prepare yourself for being approached to invest in a joint venture. If investing in a JV development appeals to you, one of the key components in your decision making is knowing the developer of the opportunity. Entering into a joint venture is like getting married, and you don’t typically decide to walk down the aisle after the first date.
Before we discuss vetting the developer, let’s confirm the reasons why you may want to work with a professional developer:
- They can most efficiently analyze your site to determine whether it has true development potential;
- A developer is the key organizer and manager of the development process, however it takes a large team of professional designers, engineers and contractors in order to bring a development to life. A professional developer will know who to call and who to hire to help in that process.
- Access to capital. Experienced developers have built a network of equity and debt partners they can bring to the project.
Who are they, really?
You will be relying on the developer’s experience, development plan, reputation, capital partners, and connections to successfully complete the project. Here are some of the due diligence or questions you should ask them. And please, don’t be bashful. You might be putting a sizable chunk of capital in their hands:
- How many projects have they completed?
- Were any not successful? If so, what was the end result for the parties who invested?
- What is their experience in the planned development type? Developing an urban apartment building is very different from a suburban retail center.
- Who is on their team, both internal and external parties. Have they worked as a team before?
Capital plan and company financial capacity.
- How much capital, i.e. cash, beyond land do they need to complete the project? Of this, how much will they be contributing? What amount of debt do they plan to borrow?
- Ask for evidence they can fund their commitment, and can fund the cash needed to get a project through permitting.
- How do they fund their own operations?
- Do they have strong banking and investor relationships? Any committed so far?
What is their reputation?
- Ask for and contact parties they have worked with in the past. This includes bankers, investors, and other parties like yourself.
Does their plan make sense?
- Depending on your experience in the real estate industry this may be difficult to know. If you are not sure, hire someone who can review the development plan. Not only from a viability standpoint, but also from a capital needs perspective.
Are your goals in line with their plan?
- Are they planning on selling the property as soon as it’s completed and leased or holding it long term?
- What is their exit strategy?
A joint venture is like getting married
Vetting a developer can be a difficult process, but should not be skimped on. You are likely making a sizable investment and you want to know the party you are handing it over to. Contributing to joint-venture is akin to getting married. Once you sign the documents and contribute your land or cash, it’s very difficult to unwind it. Luckily, when the developer “pops the question” you have time to go through a vetting process before having to say yes or no. Given this, you might consider hiring an outside party as your representative (there are professionals who do this for a living) throughout the process to make sure your best interests are looked out for.
Next Month – You’re ready to say yes.
At this point you are comfortable with the risk of entering into a joint-venture, you like the proposed project, and you have vetted the developer. You’ve also decided that you are ready to walk down the aisle by contributing your property to the project. Then what happens? In our next article we’ll discuss the dynamic process of real estate development.
Dan Whitaker provides real estate and finance guidance for families, business and government. His 35+ year career in real estate has spanned all facets of commercial real estate. He focuses on helping families with real estate work through transitions, manage portfolios, and keep the finances in order. He brings both an investor’s high-level perspective as well as an accountant’s level of detail. You can find out more about Dan on his website, here or email him at firstname.lastname@example.org.
Laura Bachman is a long time real estate professional in the Greater Seattle Area. Her work centers on taking properties through the design, permitting and construction phases of development on behalf of both private property owners and for commercial developers. Laura brings both an attention to detail as well as a background in finance to each building she brings to life. The extensive list of projects she has worked on can be found at: www.bachman-group.com.