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PANEL: DON’T LET JOINT VENTURES BECOME BAD MARRIAGES

BY STEVE MCLINDEN

Joint ventures have become the rage, as retailers, developers and landowners of varying sizes turn to one another for expertise they believe will let them tap into highly specialized market opportunities, said experts at the Spring Convention.

“We’re seeing a lot of joint venture opportunities, and they make a lot of sense,” said Michael P. Glimcher, CEO of Glimcher Realty Trust. “We can buy half at wholesale during development and then buy the other half at retail once the project’s completed.”

But choose your partner wisely, because such collaborations can spell failure as easily as success, said panelists at a well-attended session titled “Joint Venture Development: Putting the Pieces Together.”

In fact, half of the success formula of a joint venture is simply finding a trustworthy partner, says Andrew E. Kraus, managing director and principal of Cornerstone Capital Corp., Dublin, Ohio. “Chemistry is extremely important,” Kraus said. “This will not happen overnight, but you have to start somewhere. And as you build that trust, you can give the partners more and more latitude.

Similarly, the early stages of most venture partnerships are like a marriage or other long-term commitment, says Frank Mihalopoulos, partner of the Addison, Texas-based Christon Co. “You have to spend a lot of time with it to make sure it grows into what you both want it to be.” The two parties graduate from the courting stage to a true partnership, “where each party gets away with less,” he quipped. “And like a marriage, one key to a successful joint venture partnership is clearly defining the roles and responsibilities of each party to avoid any pitfalls.”

A good joint venture partner will have local connections and understand the particular area’s business culture and how to work through the politics, Mihalopoulos said. “They will know better than you what it takes to get a project done,” he said.

Define the relationship
But surprises do not a good partnership make, said Kraus. “It should be spelled out from the beginning who will be ultimately responsible for zoning, permitting, construction, contracting, leasing and other functions,” he said. “It’s better to define those rules up front to avoid misunderstandings … and delays.”

There are no set-in-stone structures for joint development deals, panelists said. “They all depend on your individual and joint objectives,” said Martin E. Stein Jr., chairman and CEO of Jacksonville, Fla.-based Regency Corp. Joint venture sizes also vary greatly. “If both the economics and the right chemistry are there, then they can make sense from a regional mall down to a small open-air center.” Such partners should be chosen with an eye to future ventures together. “Focus on repeat business,” said Stein. “It’s nice to know you will have reliable joint venture partners when you need them.”

Kraus advised choosing a responsive and nimble partner. “You have to realize in today’s market that your competition has access to an abundance of capital too, so you must act quickly on an opportunity, and with the right partner you have confidence to move forward.”

Acceptable returns from joint ventures can range from the low double digits to the upper 20 percent range, panelists said. But Cornerstone Capital is not averse to accepting high single-digit returns, Kraus said, “if you have a rosier view and have adjacent properties and pads that will be developed around it and add value.” Stein said, “I’m not so sure I’d go into single digits, but if you can generate a 10 percent unleveraged rate of return on capital, then that dog will hunt.”

Typically, parties contemplating a joint venture “either have the expertise and are looking for the capital, or have the capital and are looking for expertise,” said Rita D’Agostino, general counsel of RED Development, Kansas City, Mo. While the collaborating parties are building their own relationships, she cautioned, they must take care not to shortchange one other all-important, not-so-silent partner: the local government.

“They are often just as much of a partner in your project as the joint venture party,” she asserted.

Venture diversity
Partners come in many shapes and forms. Some of the panelists have handled joint venture developments with major grocers, such as HEB, Kroger and Publix.

Simple fee-based joint venture developments have dwindled since the early 1990s, panelists said. “While we had a successful fee-development agreement with Opus, other fee-based deals … can’t move as flexibly,” said D’Agostino. “Developers are now taking on more risk for more reward.”

Another type of joint venture development, the limited-liability corporation, is far more common than a fee-based agreement, though it is more difficult for an LLC to “swap” out of those properties in a 1031 exchange. A 1031 allows owners to sell business property tax-deferred if they then reinvest in business property of a similar nature.

Tenant-in-common property investments, a relatively new 1031 Exchange strategy pooling several investors, are becoming more popular, but these are joint ventures in which the partners rarely know one another, panelists noted. “We have been successful with some,” said D’Agostino. “But they require greater detail in documentation … plus it’s harder to build relationships.”

A landowner questioning the panel on the type of deal he should cut with a joint venture partner was asked a few questions himself. “What do you want out of it?” queried Kraus. “Do you want cash flow on an ongoing basis? Do you want creative control? Is this an estate-planning vehicle? What is most important to you?”

Another questioner said he was trying to persuade the owner of a struggling ‘B’ office building to rezone a property for retail and asked how to go about it. Panelists suggested the questioner present his vision to the building owner in the form of an opportunity. “If I was the land owner, I’d also want you to bring me a pro forma with both [office and retail] scenarios,” said D’Agostino.

“It may come down to whether you are willing to offer them more money than they think it is worth,” said Stein.

But the best joint venture projects can vastly exceed expectations under certain conditions, said Donna Trombley, business development specialist at Commercial Net Lease Realty, Orlando, Fla.

“With the right partner and the right chemistry,” Trombley continued, “you can combine the talent and commitment of two winners and leverage each other’s strengths to create something wonderful that they never could have done individually.”