Joint Ventures in Commercial Real Estate Developments for the Year Ahead: 2011

Let's be realistic: project funding since the collapse of Lehman Brother's (28 months ago) has been nearly impossible to attain. Developers have come to the painful conclusion that the old guard banking institutions are not funding and will not be any time soon. The only viable funding sources are found in the private sector. It is a new world for everyone - developers, lenders, realtors and consumers.

Unfortunately, there have been a rash of unscrupulous lenders, brokers and con artists that have preyed upon desperate developers. These criminals typically charge high upfront fees, are adept at telling developers exactly what they want to hear.... and never deliver. What remains in the market is a plethora of great projects with substantial equity that simply have not had access to the capital to complete their projects.

Because getting institutional funding is as likely as having an elf deliver you cash, developers are braving the waters of joint venture (JV) financing. JV programs are available and a seriously viable option for project funding in 2011. Unfortunately, many developers think they are entitled to more than what the market is willing to offer in financing their project.

In any JV relationship, the JV funder expects the developer to bring more to the table than just a good idea. In 2011, all JV funding partners want to see that the developer has some of the proverbial "skin in the game". To be taken seriously, the developer needs to show at least 5% (of the funding amount) of equity into the project. Those with little or no equity can be funded, but will likely be in a management position with a small equity position.

Those that have no equity (real, train-ridin' dollars) in their project are most prone to be taken by upfront fee scams and joker brokers that have no idea what the market will realistically offer. Remember, the projects are competing in a global market where most developers have 25% or more equity in the project and have a predictably profitable project. It is a huge risk for a JV funder to jump into a project that has no existing equity. The market is flooded with great projects that simply ran out of funds when institutional banking collapsed. That being said, to compete in the JV market, I have the following advice:

1. Have at least 5% equity (your own capital or equity) into the project or find an equity partner to be taken seriously!
2. Be aware of other projects competing for the same JV dollars. Is your internal rate of return competitive?
3. Stay away from brokers and lenders with exotic funding products that have high upfront fees. Does your funder have the capital (good) or does he have to create it (bad)?
4. Remember,these criminals are great at telling you exactly what you want to hear. (No one is going to give you 50% of the project if you have no equity and bring only an idea to the JV funder).