Real Insight. Real Estate.

Editor’s Note: With Valentine’s Day coming up this weekend (order your flowers ASAP!), we figured, why not start off the week with a Cupid-esque topic? We can’t wait to hear your feedback on this one….

When a joint venture partnership occurs in real estate, the term “getting into bed” is often tossed around. And despite the fact that real estate is an industry dominated by men (and therefore subject to more coarse, perverted analogies), this phrase is somewhat appropriate. When you sleep with someone, you want to make sure you are protected (from exactly what, I will leave to the reader’s imagination), right?  Well the same goes for your equity partner in a real estate transaction.  Yet, while all real estate transaction involve some form of due diligence, JV equity partnerships involve an entirely different level of due diligence.

Rather than scoping out the salient facts of the deal, examining the borrowers track record, and crossing all the “t’s” and dotting all the “i’s” of a particular transaction (like a bank might do), an equity partner has to get extremely comfortable with the sponsor’s style and personality in addition to the aforementioned due diligence.  For this reason vetting a JV equity partner has become a lot more like eHarmony than a one night stand.

The real estate equivalent of a one night stand might be buying a ground lease interest in a property. Your (yield) expectations are generally going to remain pretty low, and if you don’t do your due diligence, you might succumb to serious environmental contamination. JV equity on the other hand, is like the shy prude girl at the party. She might be gorgeous and have a lot of upside, but its going to take many dates, many questions, and really opening up your most cherished personal secrets in order for her to get comfortable with you. Rather than going simply off first looks, you and your JV equity partner need to make sure you understand one another on a deeper level.

At first, a sponsor might only be interested in the cheapest date (available money), without realizing that if they don’t fully understand the total package, they might get more than they bargained for.  Some equity partners can be overbearing and scrupulous with the amount of data and reporting they will require from you.  They will want to know all of your dirty little secrets and will press you for such information before making further commitment to the deal.  If you don’t understand that upfront, you might be in an undesirable position down the road that can hamper your business plan (and more importantly your patience and sanity). If you match a folksy, laid-back Midwestern developer with a type A, in-your-face New York equity partner, that is a recipe for disaster.

In our role as advisors, it is a real estate investment bank like Llenrock’s job to play millionaire matchmaker. If we simply played the part of Chuck Woolery (host), to let things unfold naturally as they may, we might end up with two unsatisfied contestants (both our client and capital partner). And in the end, what value would we have really added to the transaction?

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