Programmatic Real Estate Joint Ventures: A Vital Tool For PERE Investors In The Next Phase Of The Economic Cycle

RG
Ropes & Gray LLP

Contributor

Ropes & Gray is a preeminent global law firm with approximately 1,400 lawyers and legal professionals serving clients in major centers of business, finance, technology and government. The firm has offices in New York, Washington, D.C., Boston, Chicago, San Francisco, Silicon Valley, London, Hong Kong, Shanghai, Tokyo and Seoul.
The programmatic (or platform) joint venture, as an advanced iteration of the traditional joint venture (JV) model, has proven an increasingly popular investment strategy for private equity real estate investors...
United States Finance and Banking
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The programmatic (or platform) joint venture, as an advanced iteration of the traditional joint venture (JV) model, has proven an increasingly popular investment strategy for private equity real estate investors seeking to navigate an increasingly sophisticated commercial real estate market. Now, with the UK economy growing at the quickest pace of any G7 economy and a new government commanding a strong majority, we believe that the programmatic JV model could prove important in this next phase of the economic cycle.

In this article, the first of a three part programmatic JV 'mini-series', we give a timely crash course on the programmatic JV model and delve into why we think it will prove a vital tool for private capital investors and operators. In our forthcoming articles two and three, we then lift the lid on the key topics underpinning programmatic JVs and get into the nuts and bolts of how they differ from those of traditional JV structures to help arm you with an understanding of common negotiation battlegrounds.

A programmatic JV crash course

Real estate joint ventures involve a "capital partner", who puts forward the vast majority of the equity, teaming up with an "operating partner", who brings its critical expertise alongside a minority equity commitment. This marriage of expertise and capital allows the capital partner to tap into the operating partner's local market knowledge and deal flow, whilst the operating partner is attracted by the ability to supercharge its returns through receipt of a promote.

Traditionally, capital and operating partners have used real estate JVs to team up and invest into a single pre-determined asset or portfolio of assets. The programmatic real estate JV, by contrast, involves the partners creating a new standalone platform that will invest and aggregate across multiple real estate assets over a period of time, often targeting a pre-determined asset class and strategy.

Why programmatic JVs could play centre stage in this next phase of the economic cycle

Programmatic JVs have a number of adaptive features, including an ability to achieve scale quickly and create an independently valuable business. With many real estate investors sitting on large reserves of dry powder, having struggled to deploy capital in a dislocated market, we believe the model could emerge as a powerful solution in this next phase of the economic cycle.

Scale is achieved by the capital partner 'locking-in' and obtaining exclusivity, to a greater or lesser extent, over an operator's deal flow, whilst at the same time 'locking-out' its competitors. This allows capital partners to deploy capital quickly across multiple assets, which will be key in a crowded and sophisticated commercial real estate market. This ability to scale quickly will be even more important in some sectors, such as light industrial, where deal ticket sizes can be small. Similarly, investors and operators will be able to get quick exposure to market trends or fundamentals – for example, purpose-built student accommodation, where investors are already rushing to tap into a deep supply/demand imbalance.

The other key feature for programmatic JVs is the potential for the venture to become greater than the sum of its parts. Programmatic JVs present an opportunity for the investors to structure the venture to create an independently valuable business, which can attract growth capital and build a service-offering with value greater than the underlying real estate. Not only will this boost returns for investors, with valuations based on company valuation metrics, such as multiples of earnings, rather than pure underlying real estate values, but it will also widen exit options, such as through an IPO as a way to monetise investment and drive further growth.

Articles 2 and 3

Join us for parts 2 and 3 of this programmatic JV 'mini-series' where we dive into the detail of the key topics which underpin programmatic real estate JVs and we explore the key differences to traditional JV structures to help arm you with an understanding of common negotiation battlegrounds.

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.

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