The Nuts and Bolts of a Joint Venture – Part 2
The JV Agreement
The joint venture agreement exists to prevent any misunderstandings once the project is up and running. Because most real estate projects are different in some way, each joint venture contract may contain different components to suit the deal or the parties involved.
Here are a few factors to consider when creating a JV agreement:
- What financial contribution will you each make?
- When will the funds be expected?
- Who controls the money/cheque book?
- Who pays for materials, utilities, taxes, insurance, employees etc.
- What is the method of payment?
- If there is a mortgage involved, who is responsible for qualifying and paying?
- Whose name goes on title?
- Whose name goes on any utility bills or other bills associated with the project?
- Who is responsible for signing contracts with the contractor, tradesmen, managers etc.?
Management & Control
- What are each parties responsibilities?
- What are the processes to each designated task?
- Who has the final word in a decision?
- Who is responsible for hiring and firing contractors, tradesmen, property managers etc.?
- What happens if there are delays?
- What are the timelines?
- What are the systems in place to measure the processes and results?
- What is the exit strategy for the property?
- What is the plan B & C if plan A isn’t working?
- How are profits divided?
- How are losses incurred
- What happens if there is a cash call?
- What happens if there is a lien or a lawsuit?
- If there is any unique strategy, document or system being used,
does it remain the intellectual property of the party who introduced it?
- Does any database remain the property of the party who introduced it?
- Do any unique marketing strategies remain the property of the person who introduced it?
- How will the information remain protected?
- Do NDAs/NCAs need to be drafted and signed?
- How will disputes be resolved?
- What processes are in place to resolve them?
- Who will be called for “3rd party arbitration”?
- What constitutes or defines a dispute?
- Will there be a company created?
- If so, what will the share structure be?
- What are the profit sharing percentages?
- What are each party’s legal responsibilities and rights?
- How do you protect your interests?
Ending the agreement
- Are there conditions to buy out the other partner?
- How does the intellectual property unravel?
- Are there contingencies if one party goes bankrupt, gets arrested, goes missing or dies during the project?
- What timeline must be given to party A if party B wants out of the contract?
- Are there power of attorney contingencies for any of the above matters?
As in any contractual agreement, it should be vetted by lawyers for both parties. Once the agreement is signed it is now time to put the joint venture into action.
Making it Work
In any project, no matter what the strategy, it is key to maintain constant communication with all involved parties. It is essential that all parties know what you are trying to achieve so everyone is collectively working towards the same outcome. Regularly scheduled “in person” meetings, conference calls or on-line meetings should be in place continuously review the project. This enables the managing party (the one closest to the actual daily running of the project) to provide updates and perhaps suggest ways to improve any systems created or suggest any changes necessary in the initial objectives.
As such, it is necessary to create key indicators which allow you to measure performance. Whether the performance is based on money or achievements based on timelines, you need benchmarks in place to give you early warnings of any potential problems.
In conclusion, it is important all parties are protected and there is a contract in place to keep the project on track and safeguards in case of any unforeseen circumstances. You ensure more successful projects when there is communication and full understanding from all involved.
Excerpt from Canadian Real Estate Wealth Magazine
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