Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Real Estate Joint Ventures, October 2010
Joint ventures are commonly formed for the purpose of enabling the participants to mitigate the financial risk of participating in a project. This is particularly the case in respect of commercial real estate projects, which tend to be more expensive and less liquid than some other investments.
The term "joint venture" has no precise legal meaning, but generally denotes an association of two or more persons, usually governed by contract, pursuant to which such persons agree to combine their money, property, knowledge, skills, experience, time and other resources in the furtherance of a project, usually agreeing to share the profits and losses, and with each having some degree of control over the venture.
Joint ventures also enable the participants to pooI their expertise and resources for the benefit of all of the participants. In commercial real estate joint ventures, for example, it is common for one participant to bring real estate development or management expertise to the table, while the other participant or participants contribute financial resources. Canadian pension funds are frequently joint venture participants in the latter role and their particular requirements often mandate the structure of the joint venture enterprise.
It is anticipated that there will be more joint ventures in the real estate sector in the next few years. A number of factors serve to explain this development. One such factor is that several offshore investors are keen to invest in Canada but have not been able to locate a desirable project. At the same time, such investors do not have their own local connections and the requisite expertise to manage Canadian properties. In such circumstances, teaming up with a Canadian owner which has such management expertise and which is prepared to part with some of the equity in its trophy properties makes considerable sense for a non-Canadian investor.
For a Canadian owner required to refinance its real estate assets and recapitalize its portfolio to satisfy the more rigorous loan-to-value ratios which currently pertain, an equity participation through a joint venture may be an attractive approach – especially considering the alternatives of disposing of a number of assets or endeavouring to obtain second-mortgage or mezzanine financing at unattractive interest rates. Additionally, a joint venture arrangement would more likely satisfy the requirements of a first mortgagee, in contrast to the alternative of second-mortgage or mezzanine financing, which financing is often prohibited by the terms of the first mortgagee's loan agreement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
