![]() They gain a massive amount of capital from the LP, making it possible for them to close on one or multiple big-money deals. However, the hard work is worth it for the GP. It’s why they are often called the “operating partner.” The GP also acts as the “boots on the ground” for the project managing day-to-day operations. The sponsor comes to the capital partners with the business plan, proforma models, case studies, and everything else that will make the LP jump at the investment opportunity. If it seems like the GP (sponsor) is doing most of the work in a joint venture agreement, it’s because they are. Also, GPs often include fees that are charged to the LP throughout the course of the venture to cover operational costs. If the return on equity (ROE) is estimated to be 8%, the GP and LP see an $80,000 and $720,000 return, respectively.Īn example of a GP waterfall would be an additional 15% return on everything over the 8% benchmark. That means the GP’s investment is one million and the LP’s investment is nine million. Say you’re a GP who strikes a 90-10% deal with your LP, and the required investment from joint venture equity is $10 million. A common waterfall hurdle is earning an increased rate of return over a certain level of return Promote structures are added pay-outs that GPs can enjoy if they reach an agreed-upon return specified in the joint venture contract. To sweeten the deal for the GP, promote structures or “waterfalls” are written into the deal. However, ventures are designed so each partner receives the same returns relative to their investments. A joint venture can be structured in dozens of creative ways so each partner sees the returns that are most beneficial to them. With their powers combined, they work together toward the primary goal of increasing profit. Substantial ReturnsĪs we just mentioned, returns are at the forefront of the minds of the JV partners. In commercial real estate specifically, these ventures enjoy the following benefits. ![]() Other than simply seeing sizable investment returns, joint ventures have other appealing advantages for investors. For the investors in a joint venture, the end goal for taking on these projects is always the same: to earn a significant return on their investment and increase profits. It can be to develop land, repurpose a building, refinance a property’s existing capital stack, and more. ![]() When it comes to commercial real estate finance, the specific task can have many facets. The joint venture is its own entity, separate from all the business activities of the partners involved in the arrangement. All members of the joint venture must contribute to the costs of achieving the specified task and are responsible for any losses or profits. Joint venture partners join forces to accomplish one specific task. Business partners work together toward achieving a successful company and have many goals in common. LPs usually have billions of dollars that are backed by some sort of fund, sovereign and pension funds being the most common.Īlthough the members of a venture are often referred to as partners - and can even have a legal structure as a partnership (though LLC is most common) - they are not partners in the classic business sense. In contrast, the LP is the person or group of people with the capital. ![]() The GP is usually the developer of the asset but can sometimes be a local investment group. In terms of commercial real estate, the joint venture typically consists of two main partners: a general partner (GP) and a limited partner (LP). The easiest way to break it down is that a joint venture is an arrangement where two investors create a partnership to purchase an asset.
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