Joint Venture Equity

A Joint Venture equity partner will reside in the lowest position of the capital stack, sharing in the General Partnership entity with the project Sponsor. Distributions are paid out in layered return hurdles, that are triggered after achieving predetermined Internal Rate of Return targets. This is commonly known as a “Waterfall”. Typically, after achieving IRR targets, the Sponsor is paid an additional Promote out of the remaining proceeds. JV Equity partnerships allow borrowers to take on larger transactions using less of their own capital, sharing in some of the financial risk in exchange for potential upside profit.

Situation Suited to Joint Venture Equity:

  • A real estate developer is planning to purchase a 200-unit multifamily apartment community. The developer finds that with some minor improvements to the property and operations, they will be able to increase rents by 20% over the next 3 years. The sponsor is not able to come up with the full equity amount on their own, and decides to bring in a Joint Venture Equity Partner. The JV partner not only brings capital to the transaction in exchange for an ownership percentage, but also increases the overall net worth and liquidity of the partnership, resulting in more favorable terms from the senior debt lender. The Developer and the JV Partner split the share of equity 25% / 75%, with the developer agreeing to pay the JV Partner a minimum of 15% IRR before taking any share of the profit. After achieving the IRR target, the returns shift to 60% / 40% in favor the sponsor.