Print Article

It is always useful to begin discussion of a topic by defining terms. So what is a joint venture? And how does it differ from other investment vehicles such as general partnerships, limited partnerships, and TIC´s (tenant-in-common arrangements)?

A joint venture is a general partnership created for a single specific purpose, usually pertaining to a specific property. One example would be investors pooling resources and efforts in order to buy, rehab, and re-sell either a residential house or a commercial project – a flip, in other words. Another example would be investors acquiring raw land to hold for a couple of years and then sell.

A joint venture differs from a general partnership in its narrower scope. General partnerships are created for the long term for a broad range of business purposes. They may contemplate engaging in various enterprises with the intention of enduring from one transaction to the next into the indefinite future. Joint ventures, by contrast, have a specific task and time frame. They perform that task, net profits are distributed, and they are done.

Attached at the end of this article is our Joint Venture Checklist which will assist clients in organizing and communicating essential information to the attorney who will be drafting the JV agreement.

All Texas partnerships, including joint ventures, are subject to the Texas Revised Partnership Act (Art. 6132b-1 et seq., Texas Revised Civil Statutes). In the context of real estate JV´s it is also important to have a working knowledge of the Texas Property Code. Sophisticated investors keep a paperback copy of the Property Code on their desks.

Limited partnerships, in which a general partner (a corporation or LLC) is the only member to assume unrestricted liability, are more often used by sophisticated investors engaging in large commercial transactions. All of the partners are corporations or LLC´s and the members have knowledgeable attorneys who have crafted lengthy, clever documents. This article will bypass further discussion of limited partnerships and instead focus on smaller-scale real estate joint ventures.

What about TIC´s? How are these different from joint ventures? Our explanation will reveal our bias against these arrangements.

TIC´s are written up as general partnerships but are nonetheless focused on a specific deal – often a larger project such as an apartment complex or a strip center. Promoters seek out investors, usually affluent novices, who are packaged together in their personal capacities. In other words, these newbie investors do not form an LLC or corporation to act on their behalf in the deal; they sign the TIC agreement individually and then go on to execute or personally guarantee a seven-figure note to a bank. In a declining market, the results are almost uniformly awful. Only the promoters – who have since taken their commissions and moved on to other schemes – win.

Over the years, this firm has counseled many TIC investors who have suddenly awakened to find that a lender seeks to hold them individually liable for the entire amount of a seven-figure debt. Few of these persons consulted an attorney before signing up with the TIC. Many are otherwise smart and successful professionals who should have known better.

No contract or transaction should ever be entered into without a thorough consideration of its asset protection ramifications if the deal fails. It is often the attorney who must counsel a starry-eyed, in-a-rush client that his proposed transaction could fail as well as succeed. In the event of failure, what is the exit strategy? Which of the client´s assets will be exposed? How can that exposure be limited? Example: an attorney will always want to insert a non-recourse clause in any note that his client signs.

Lawyers can often see disaster looming, not because they are prescient but because they have seen this movie before. In certain cases, when a happily oblivious client is determined to self-destruct, this writer has found it necessary to decline that particular representation.

Intelligent structuring implies an awareness not only of the mechanics of a proposed transaction but also of potential outcomes and their consequences. A willingness to look down the road, so to speak, where it may fork one way or another. Many clients are astonishingly reluctant to this, accusing the attorney of trying to "kill the deal" – an entirely unjust charge. An attorney´s job is to make the deal work successfully, which brings us back to structuring issues.

Sophisticated investors will have an entity – perhaps a management company – that (acting through an assumed name) is utilized for business with tenants, vendors, contractors, brokers, and other persons who might one day get riled up and file a lawsuit. In this firm´s recommended asset protection system, the management company is a shell that contains employees, rental furniture, and leased vehicles. It is a dead-end for creditors. Hard assets reside in a separate stand-alone "holding company" that does business with no one and that the public does not know exists. In any case, knowledgeable and prudent investors never sign contracts, leases, and the like in their personal name. All decisions are made with an eye toward asset protection.

In the context of a joint venture, it is therefore preferable for a savvy investor to choose an existing entity he owns (LLC or corporation), or perhaps form a new entity, in order to participate in the venture. This provides a liability barrier. And when it comes to personal signatures and guarantees, he "just says no."

The title of this section is only partially intended to be humorous. All lawyers can tell stories of clients who propose doing a transaction with a brother-in-law, or perhaps borrowing money from parents, and declare that no written agreement is necessary because the other party is family or a close friend. In fact, the reverse is true. In these instances it is more important to reduce the agreement to a signed writing, not less so. Anyone who has witnessed the agony of intra-family litigation knows this to be true.

When it comes to drafting contracts and agreements, this writer takes the position that the effective date, the name and contact information of the parties, and the subject property should all be plainly visible on the first page. Joint venture documents are no exception.

Of course, there are additional issues that should be addressed even in short joint venture agreements:

Joint venture agreements do not need to be unduly complex, long, or intimidating – which is not to say that they are not critically important, both to the individual participants and the success of the enterprise. Consult an attorney knowledgeable in the field in order to draft joint venture agreements and before signing one. NEVER use forms off the internet for this purpose. They are toxic waste.

The author apologizes for repeatedly using "he" and "him" when referring to real estate investors. It was done as a matter of stylistic convenience. Many of our most successful investor clients are women.

Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.

Copyright © 2013 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, www.LoneStarLandLaw.com.

1. JOINT VENTURERS (the "partners"):     

Note: As asset protection attorneys, we always prefer that the JV partners be LLC´s or corporations rather than individuals.

            1. Name as will be signed: _______________________________________________

            Address: _______________________________________________________________

            Tel. _____________________________     Fax: _______________________________

            Email: ________________________________________________________________

            Contribution to JV: ______________________________________________________

            Percentage interest in JV: _________________________________________________

            2. Name as will be signed: _______________________________________________

            Address: _______________________________________________________________

            Tel. _____________________________     Fax: _______________________________

            Email: ________________________________________________________________

            Contribution to JV: ______________________________________________________

            Percentage interest in JV: _________________________________________________

            3. Name as will be signed: _______________________________________________

            Address: _______________________________________________________________

            Tel. _____________________________     Fax: _______________________________

            Email: ________________________________________________________________

            Contribution to JV: ______________________________________________________

            Percentage interest in JV: _________________________________________________

2. JV PROPERTY (PLEASE ATTACH COPY OF DEED IF AVAILABLE):

Street address: ______________________________________________________________

Legal Description (lot and block)

            _____ See attached deed (preferred so we can track legal description exactly)

            _____ See attached Exhibit A (for metes and bounds descriptions)

            _____The legal description is: ____________________________________________

            ____________________________________________________________________

            ____________________________________________________________________

            Note: Do not use the abbreviated description from a tax certificate.

3. PURPOSE OF JV:

            _____ acquisition, rehab, and resale of the property (flip)

            _____ other: __________________________________________________________

            _____________________________________________________________________

4. EFFECTIVE DATE OF JV: ________________________________________________

            This can be different than the signature date.

5. MANAGEMENT OF JV:

            Decisions:

            _____ by majority vote of percentage interests

            _____ by unanimous vote of all partners

            _____ other: _________________________________________________________

            Day-to-day Management:

            _____ We will have a managing partner. Name: _____________________________

                        Limits on authority? _____________________________________________

                        _____________________________________________________________

            _____ No managing partner.  We will run things informally by consensus.

            Bank Accounts:

            The following names/signatures will be required in order to sign checks:

            ___________________________________________________________________

6. SPECIFIC ACTIONS AND DUTIES OF PARTNERS:

            If each partner will have certain duties or responsibilities, please describe: _______

            __________________________________________________________________

            __________________________________________________________________

            __________________________________________________________________

7. LOANS TO THE JV (IF ANY):

            _____  No loans or borrowing at this time.

            _____ We will be borrowing from a hard-money lender.  Details: _______________

            __________________________________________________________________

            __________________________________________________________________

            _____ Individual partner(s) will be loaning money to the JV.  Details: ___________

            __________________________________________________________________

            __________________________________________________________________

8. ADDITIONAL DOCS REQUIRED (IF ANY):

             We  _____ will    _____ will not need the attorney to draw up one or more promissory notes ($75 each).
                     These notes  ____ will    _____ will not be secured by a deed of trust.

             We  _____ will     _____  will not need the attorney to draw up a deed of trust - $225 (add $25 if the attorney
                     is named as trustee)

             We  _____ will     _____ will not need a warranty deed from the existing owner into the name of the joint
                     venture. If so, attach copy of existing deed.

             Other additional document(s) required: _________________________________________
                      ________________________________________________________________________

9. PARAMETERS OF THE DEAL:

            If the transaction with the subject property will have certain agreed-upon factors such as

           expense budget, initial resale price, etc., please supply details: _________________

            __________________________________________________________________

            __________________________________________________________________

            __________________________________________________________________

10. DISTRIBUTIONS:

            _____ Distributions will be on the usual net pro rata percentage basis.

            _____ Distributions will be made another way.  Details: __________________________

            _____________________________________________________________________

11. SELLING, WITHDRAWING, OR DECEASED PARTNER:

             _____ Write the agreement in the usual way, with the remaining partners having a right of first refusal.

             _____  Write the agreement differently.  Details: ______________________________

            _____________________________________________________________________

12. DEFAULT BY A PARTNER:

            ______ Write agreement allowing us to expel a defaulting partner after notice.

            ______ Write the agreement differently.  Details: ___________________________

            __________________________________________________________________

13. MEDIATION:

            ______ Mediation will be required in the event of a dispute among Partners.

            ______ Mediation will not be required.

14. VENUE:

            Venue for litigation purposes will be in __________________ County.

15. SPECIAL PROVISIONS (ADD ANYTHING ELSE YOU THINK WE NEED TO KNOW):

            __________________________________________________________________

            __________________________________________________________________

            __________________________________________________________________

                                                            Name of person completing this JV Checklist:

                                                            _______________________________________________

                                                            Contact address: _________________________________

                                                            ______________________________________________

                                                            Phone: _________________ Fax: __________________

                                                            Email: _________________________________________

These instructions may be emailed to LoneStarLandLaw@aol.com or faxed to (832) 201-5321.