June 2024 – Foundation of Trust: How to build a successful joint venture

Daniel Walsh
Founder and CEO
Citymark Capital

Smart Business, June 2024 – While in business school at Case Western Reserve University, my professors described various business organizational structures: corporations, sole proprietorships, joint ventures (JV). They noted that establishing a joint venture is the most difficult structure to execute. Not one to shy away from a challenge (or a glutton for punishment), I’ve spent most of my career forging new JVs with dozens of operating partners. Given today’s market challenges and uncertainties, the success and failure of JVs are being tested as they face tough decisions about how to maximize value.

At Citymark, we provide JV equity capital to apartment operators across the U.S. who acquire institutional-quality properties. Approximately 400 operators contact us annually with investment opportunities, so we see a broad spectrum of potential partners. I have been working with many of these companies since the 1990s when I created a similar JV business at KeyBank.

Based on these experiences, I believe the most important ingredients for a successful JV are 1) an unshakeable trust and chemistry between partners; 2) respecting each partner’s value and values; 3) shared vision of success; and 4) alignment of interests.
In our JVs, we provide the majority of the capital as a passive investor and our partners are entrusted to run the day-to-day operations to execute on our shared vision on the future value creation plan. A detailed JV agreement is negotiated with our prospective partner; laying out the business plan, financial projections, split of economics and rules for how the JV will be governed (budget approvals, disposition, dispute resolution). The goal is to align our respective interests so that our operating partner is economically incentivized to exceed our business plan.

When we partner with institutional operating partners who are accustomed to working with sophisticated capital providers, like Citymark, we expect a tough but fair negotiation. For those apartment operators with a track record of success, through various market cycles, this process is pretty straightforward. One of my favorite operating partners who appreciated that there is only so much a JV can predict or control, said at the beginning of our partnership, “We feel confident we’ll achieve a successful outcome, but the path to success may be different than the one we expect.”

Sometimes when working with a new potential JV partner, negotiations can get quite protracted, with battles over every future penny of potential profit, resulting in complicated waterfalls and fee structures. This can be a red flag and inhibits the establishment of a trusting relationship. When markets are healthy and growing, it is these kinds of partners who can appear capable and trustworthy, but may underperform under economic distress.
Even the best-designed JV agreement will not provide protections where trust is not fully established or maintained between the partners. These JVs are not worth it. It is important to conduct “reputational due diligence” to see how each party has conducted their business in good times and bad times with other partners. Have they always been a good partner?

Great partners make the right decisions together in tough times, regardless of what the JV documentation says. I am fortunate that I have been part of multiple successful JVs with operating partners for over 25 years, creating value for those partnerships. These are trusting relationships. Another long-term JV partner said, “I only want to JV with someone with whom I would spend several hours at an airport bar during a delay.” Airport delays, and JVs, can be challenging, but with the right partner you can arrive at your shared destination.

Smart Business Cleveland – June 2024 Full Issue

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The information contained in this communication should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. The general information discussed is not a guarantee, prediction, or projection of real estate investments. There are risks associated with investing in real estate assets, such as inflation, interest rates, real estate tax rates, changes in the general economic climate, local conditions such as population trends and neighborhood values, and supply and demand for similar property types. This communication may contain forward-looking statements identified by the use of words such as “outlook,” “indicator,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive.