American Nevada Co. (ANC) a Henderson-based commercial real estate developer, has teamed with Las Vegas’ The Vista Group and Atlanta-based Place Properties to develop Midtown Place, a 3,000-suite, University of Nevada, Las Vegas, student housing complex. ANC also is partnering with MGM MIRAGE and Diamond Resorts to master plan a mixed-use community on 166 acres in Jean, Nevada. And yet another partnership with Hyatt Corp. and Woodbine Development Corp., American Nevada Co. is building non-gaming Hyatt-brand hotels in the Las Vegas Valley. Since its inception, ANC has pursued partnerships with other firms and today, more than one-third of its development undertakings are joint ventures.
“We have found it very rewarding, financially beneficial and successful to work with great people,” said Bruce Deifik, president and chief executive officer of American Nevada Company. Formed in 1974, ANC is the commercial real estate development branch and wholly-owned subsidiary of Southern Nevada’s Greenspun Corporation.
Forming joint ventures with one or more partners is a strategy many Nevada developers employ to fund and execute commercial projects.
“A joint venture is really a partnership but usually for a specific purpose,” said Bill Urga, managing partner with the 37-year-old Las Vegas law firm of Jolley Urga Wirth Woodbury & Standish.
The Partnerships
People typically enter into a joint venture to gain an asset—money, equity, credit capability and/or land—or skill set they lack such as development/construction, management or operations expertise, said Bruce Leslie, partner with Armstrong Teasdale LLP.
Partnerships can vary in their structure, with financial contribution being the most frequently varied element of the partnership. Each partner may be required to contribute an equal fixed amount or, depending upon the expertise of each partner, the contributions may be categorized that way. For example, it is common to have one party with the asset, such as land, and another with the expertise to develop the asset.
A good example of this is Marnell Corrao Associates, a Nevada-based company providing design-build services for the hospitality industry. They are developing the M Resort Spa & Casino in Las Vegas with a $160 million investment from entertainment company MGM MIRAGE.
Aliante, a North Las Vegas master-planned community that, in August, was in its final phase of development, is a joint venture between American Nevada Co. and home builder Pulte Homes.
It is common for developers to enter into partnerships with other developers. In July, The Siegel Group Nevada Inc. and Great American Capital, both developers, acquired and plan to expand Deer Creek Apartments, a 330-unit complex in Las Vegas. ANC and Ohio developer, Forrest City Development, developed the Seven Hills master-planned community. This joint venture was a way for the Ohio firm to break into the Southern Nevada market, Deifik said.
More infrequently, developers join forces with government entities. In Northern Nevada, the Reno Redevelopment Agency, Washoe County and SK Baseball, a group of businessmen—Stuart Katzoff, Jerry Katzoff and Herb Simon, have partnered to fund and build an $81 million, 10,000-seat AAA baseball stadium and a surrounding retail and entertainment district. SK Baseball will supply $38 million, develop the stadium in time for the 2009 season and bring the Tucson Sidewinders baseball team to Reno. The Reno Redevelopment Agency assembled the site and will reimburse SK Baseball with tax increments as the stadium develops. Washoe County will issue revenue bonds supported by future car tax revenues for a total contribution of $27 million.
“This is a prime example of a private-public partnership,” said Mark Lewis, redevelopment administrator for the Reno Redevelopment Agency, the City of Reno’s economic development arm. “It’s a very successful, well-balanced partnership, and the public’s risk is minimized here.” Development of the stadium, which now is under construction, would not have been possible without the use of a joint venture.
“It used to be in the old days that cities would build these stadiums and take the risks on them,” Lewis added. “Those days are pretty much gone. You have to come up with dynamic, innovative ideas. This just goes to show they can be done.”
More joint ventures are being seen between developers and charitable organizations as the latter expands business into taxable arenas, Leslie said. Together with ANC, the Nevada Cancer Institute, a nonprofit organization, is expanding its campus. The 101,000-square-foot expansion will include office and research space, a 200-seat conference center, a medical library and a parking garage.
Partners in joint ventures for commercial real estate development may or may not have existing relationships with one another. “It’s not unusual to have joint ventures between total strangers,” Leslie said.
Whether or not more joint ventures are being formed today as opposed to two years ago when the economy was stronger is indeterminable. When land prices spiked, there seemed to be a trend in the general construction and hotel industries toward the rise of joint ventures, Urga said. However, over the past six months very little development has been taking place and numerous projects have come to a halt, making it hard to gauge the effectiveness of joint ventures in the face of the depressed economy.
Market Challenges
In today’s economy, few developers, particularly local ones, have the funds to repeatedly cover the high costs of land and development. In the case of ANC Deifik said, “We have capital, but we don’t have unlimited capital.” Joint ventures can bridge this gap.
Securing a loan or credit is much more challenging today than two years ago. Heavier equity is required. A partnership might help achieve the necessary equity.
Additionally, loan amounts are much lower, Leslie said. Lenders are taking a conservative approach in looking at current and future deals. “Banks won’t and can’t make you the same optimistic loan they made two years ago when everything in the market was moving up,” Leslie added.
All of the above contributes to fewer loans being made. During the first half of the year, loans granted for commercial development were down 53 percent compared to the same period in 2007 industry-wide, said Devin Lee, president and co-owner of Access Commercial Mortgage, a Henderson company providing customized commercial loans for investment properties. “At Access Commercial Mortgage, loans are down between about 25 to 35 percent,” Lee said.
Consequently, more equity, rather than debt, deals are being transacted.
It is easy to believe that high development costs and the tight credit market are forcing some developers to seek joint ventures to help bear development costs.
“Developers just don’t have the capital to build projects,” Lee said. “Where it might have been a 10 percent down payment a year ago, it’s a 30 percent requirement now. They can do three times fewer projects or go find some guys with money.”
Joint ventures allow the partners to spread out the business risk. Sometimes even the large national companies who do not need joint ventures for their projects enter into them as a means of limiting their exposure. “You don’t have all your eggs in one basket [with a joint venture],” Urga said.
Bruce Deifik asserts that joint ventures may have helped some developers better withstand the economic downturn the nation is currently facing.
“Unfortunately, some very good companies in the Las Vegas Valley have become challenged because of the economic times we’re dealing with,” he added. “I think that in hindsight people would say, ‘Boy, I sure wish I would have gotten involved with some joint venture partners. That would have helped me weather the storm.’”
City Crossing 1 LLC, an entity controlled by Las Vegas-based Plise Development & Construction filed for Chapter 11 bankruptcy earlier this year. At that time, Plise said it was in discussions with a national company about possibly forming a joint venture for completion of the $2 billion, mixed-use development project in Henderson.
Establishing a Joint Venture
It is imperative that a written contract be created and signed when pursing a joint venture.
“It can be as simple or as complex as you want it to be,” Bruce Leslie said. “I’ve seen them on the back of a napkin, and I’ve seen them 200 pages long.”
The agreement should outline each member’s duties and obligations. It should delineate when the money must be provided for the project, who will handle the money, the conditions for drawing on the money, when the money earned is to be distributed and how much each party will get. It should also include how the joint venture can be dissolved if need be.
“If you don’t have these essentials in your agreement, you’re leaving the door open for potential problems,” Leslie added.
More complex issues can include how certain tax matters are handled. Additional stipulations might specify what happens if someone does not or cannot contribute their share of the money, if a member dies or files bankruptcy and if someone wants to sell their interest. Others include how the expenses and any disputes are dealt with.
“The more elements you cover in the contract, the less likely there are going to be problems that aren’t going to be resolved by looking at the document,” Urga said.
Because a joint venture is an unlimited liability entity, its members are personally liable for any joint venture debts or potential issues, for example, an injury, Urga said. Consequently, some layer of protection for the members needs to be in place, and this typically is effected by having the members enter into the joint venture as separate companies or limited liability corporations rather than as individuals.
The Risks of a Joint Venture
Along with the risks inherent in any business deal, those specific to joint ventures include being bound by a partner’s actions, Urga said. For example, if one partner purchases something for the project but outside of the agreement, the other partners may be stuck helping pay for it.
The partners could wind up not getting along and their relationship turns sour.
“Any time you have a partner, whether it’s a marriage or a business transaction, there are a lot more moving parts that can go wrong,” Leslie said.
Oftentimes, the partner contributing little or no money to the deal has little say and control.
“Money is usually the king in these relationships,” Leslie said. “There’s plenty of real estate and plenty of talent but not a lot of debt capital or risk equity capital lying around.”
Contacts can change when people leave their companies or change positions. This turnover within partnering firms can also upset the balance of a deal.
Ensuring Against Failure
While no guarantees for a successful joint venture exist, certain factors are common among those that do well.
It must be clear up front what is expected of each party and how the money, once made, will be distributed, Leslie said. Trust is imperative among the partners.
The business idea has to be a good one, Urga said, and all partners must follow through with their obligations.
Communication is essential.
“You share the obligation to talk about things, discuss things and make decisions together,” Deifik said. “There’s no downside to a joint venture if you’re willing to do things in an open book fashion and you communicate.”
On the flip side, joint ventures often fail when a party cannot or does not fund or continue to fund the project, Urga said. This is the case with Echelon Place, a joint venture between Boyd Gaming Corp. and several partners to develop and operate a $4.8 billion hotel & casino resort. In August, Boyd Gaming stopped construction on the project, attributing the stoppage to concerns that two of the partners could not arrange suitable financing for their portions of the project and current economic conditions.
Two members with conflicting personalities and an inability to compromise can also doom a joint venture, Leslie said. Having too many managing partners and not paying attention to the expenses and the minutiae of a project also can be problematic.
“There has to be one managing partner,” Deifik said. “You can’t have too many cooks in the kitchen.”
Achieving a Successful Joint Venture
To increase the chances for a prosperous joint venture, partners should adhere to some basic principles, experts said.
Before entering into a contract, thoroughly research the project and the potential partners, especially if they are unknown to you. Partners should be honest, trustworthy and have integrity.
“These things are marriages,” Urga said. “That’s what it really comes down to. You better know whom you’re dealing with.”
Be willing to walk away from a deal if anything about it bothers you. The deal may not appear solid, a partner may make you nervous—whatever the case, do not go forward.
When you want to proceed, hash out the key issues—expectations for performance and the relationship, duties, division of profits and more—before the agreement is drafted.
Involve your lawyer from the outset and have them create a written contract.
“Do not be pennywise and pound foolish,” Urga said. “Make sure your attorney draws up an agreement. Handshakes don’t work in today’s world. Drafting the document is the most critical part in avoiding as many of the issues that come up as possible.”
Once the deal is in place and the project is under way, pay attention.
“Follow good prudent business practices as far as keeping your eyes wide open and not letting things fall through the cracks,” Deifik said. “Things can get away from you very quickly if you don’t.”
Know that problems will arise and adverse events will happen.
“You can document a joint venture, but if someone wants to tarnish the partnership they will regardless of the precautions you take,” Deifik said. “Don’t let that deter you from moving forward and looking to be partners with good, solid, hard-working people.
