Suneet Singal on joint ventures in a development

Suneet Singal has a published background in real estate and corporate finance, so a joint venture belongs in the reference as a contract a reader can parse. Filings on this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. They do not describe a partnership, a promote, or a project. A development joint venture is an agreement between a sponsor, who often does the work, and a capital partner, who often supplies most of the money. The agreement, not the pitch, sets contributions, decisions, fees, and the split of whatever cash the project produces. This entry uses a labeled hypothetical and says what the contract still cannot promise. It is not legal advice.

Who is at the table

A sponsor in a development is the party expected to find the site, pursue entitlements, oversee construction, and lease or sell the result. A capital partner is the party expected to write most of the equity checks. Sometimes there are more than two, and sometimes the sponsor also writes a meaningful check. The names in a teaser matter less than the names in the draft agreement and the amounts next to them. If the sponsor's cash contribution is small, say so. The work can still be real. The cash is a separate fact.

The venture is usually a limited liability company or a limited partnership formed for the project. The entity owns the land or the contract to buy it. The partners own interests in the entity. That structure is why a mezzanine lender, discussed in the senior debt and mezzanine entry, may take a pledge of equity interests rather than a mortgage on the land. You do not need to memorize entity law to read the deal. You need the agreement, the loan documents, and a sources-and-uses page that adds up.

Development adds risks that a stabilized purchase does not have in the same form. The building is not finished. The budget can move. The lease-up has not happened. Entitlements can be incomplete. Due diligence on a development site, covered in the due diligence entry, is how either partner tests the assumptions before the capital is stuck. A joint venture does not remove those risks. It decides who funds them and who decides what to do when the budget changes.

Capital, calls, and what happens if someone does not fund

The agreement should state who contributes cash, property, or services, and when. A common pattern is a closing contribution and later calls as construction draws require equity alongside the construction loan. The page should show the total equity and the percent each party funds. In a labeled hypothetical, the project needs $10,000,000 of equity. The capital partner contributes $9,000,000. The sponsor contributes $1,000,000. Those are 90 percent and 10 percent of the equity checks. They are not automatically 90 percent and 10 percent of the profits. Profit splits are a later section of the agreement. Do not assume they match the funding percentages.

Additional capital is where many ventures get tense. The agreement should say whether calls are permitted, for what purposes, on what notice, and what happens if a partner does not fund. Typical consequences include a loan from the funding partner at a stated rate, a dilution of the non-funding partner, or a loss of some promote. The hypothetical does not pick one. Your draft will. Read that section before you read the splash page about alignment. A partner who can be diluted, and a partner who cannot be forced to fund, do not have the same position, even if both are called members.

Cost overruns deserve their own paragraph in the model and in the agreement. If the hypothetical construction budget rises by $1,000,000 and the construction loan does not increase, someone must fund the gap. If the agreement says the sponsor funds overruns up to a cap, write the cap in dollars. If it says overruns are shared 90/10, a $1,000,000 gap is $900,000 and $100,000. If it is silent, the model should not assume a silent rescue. Silence is an open term. Mark it open until the draft speaks.

Preferred return and promote, in one simplified period

A preferred return is a priority on distributions until a stated return on contributed capital is reached. It is not a promise that the project will earn that return. It is a rule for the order of checks if cash exists. In a labeled hypothetical the preference is 8 percent per year, and the agreement must say whether unpaid preference compounds. This page uses 8 percent only so the arithmetic is visible. It is not a market quote.

A promote, sometimes called a carried interest, is an extra share of profits to the sponsor above what the sponsor's capital contribution would suggest. It is often staged in tiers. A simplified hypothetical, which ignores timing, fees, and unpaid preference that has compounded, looks like this. The venture distributes $12,000,000 over its life. Capital of $10,000,000 is returned first. That leaves $2,000,000. If the preference for the simplified period is $800,000, which is 8 percent of $10,000,000, the residual is $1,200,000. If that residual is split 70 percent to the capital partner and 30 percent to the sponsor, the numbers are $840,000 and $360,000. Add back each party's returned capital and the preference they were owed. The capital partner, who put in $9,000,000, is not "70 percent of everything." The sponsor, who put in $1,000,000, is not "30 percent of everything." The waterfall is a sequence. Read it as a sequence.

That paragraph is a teaching sketch. A real waterfall accrues by day or by month, may compound, may pay fees before the preference, and may change the split after a higher hurdle. Ask for a spreadsheet that traces one dollar of distributable cash through every tier, and match it to the agreement's definitions of "capital," "preference," and "promote." If the spreadsheet and the agreement disagree, the agreement controls, and the spreadsheet is wrong until it is fixed. Do not average the tiers into a single sponsor percent for a slide.

Fees sit in front of the split

Sponsors are often paid fees: an acquisition or development fee, a construction management fee, an asset management fee, and sometimes a disposition fee. Fees can be earned whether or not the promote pays anything. In the hypothetical, a development fee of 3 percent of a $20,000,000 project cost is $600,000. That fee might be paid from the budget during construction, which means it is part of the cost the equity and the loan are funding. It is not a detail. It is a use of cash that changes what "sponsor puts in $1,000,000" means if the fee returns cash to the sponsor while the project is still a hole in the ground.

Put every fee on one schedule: who pays it, who receives it, when it is due, whether it is inside the development budget, and whether it is paid before the preferred return. An asset management fee of a hypothetical 1 percent per year on committed equity would be $100,000 a year on $10,000,000. Over a five-year life that is $500,000, before you talk about a promote. A reader who studies only the promote has ignored a stream that may be more reliable than the promote, because the fee does not wait for a profit.

Related-party contracts belong on the same schedule. A general contractor, a property manager, or a leasing broker affiliated with the sponsor is not automatically improper. The agreement should say whether the capital partner must approve the contract, what the price test is, and what happens if the affiliate's work is the subject of a dispute. A fee at "market" is a claim. The file should say how market was checked. This is ordinary contract reading. It is not a finding about any real sponsor, including anyone named on this website.

Governance is a list of decisions

Day-to-day work and major decisions should be different lists. Major decisions often include the budget, a budget change over a stated dollar amount, a sale, a refinance, an affiliate contract, and additional debt. The agreement names who may decide each one. A sponsor with day-to-day control and a capital partner with a veto on sale and on overruns is a common shape. It is not a universal shape. Read the list. If "major decision" is defined in a way that omits the budget, the veto you think you have may not cover the decision you care about.

Removal rights are part of governance. Some agreements let the capital partner remove the sponsor for a defined cause, such as a material breach or a failure to fund. Some allow removal without cause and some do not. The consequence for the promote on removal might be a forfeit, a reduced share, or a share that continues. Those are among the most important paragraphs in the document, and they are easy to skip because they sit far from the splashy return exhibit. Read them while the project is still hypothetical for you, not after a dispute has started.

Reporting is a governance tool that does not look like power. Monthly draws, a construction report, a lease-up report, and an annual audit give the capital partner the facts required to use whatever consent rights exist. A right to approve a budget is weak if the budget arrives after the money is spent. The agreement should set dates. If you are the reader and not a party, you still want to see that the dates exist. A venture that cannot say when numbers are due is a venture whose model is unaudited by design.

Usual mix-ups

People treat the promote as if it were a salary, and the preferred return as if it were interest on a loan. A salary is a cost of employment. A promote is a share of profit under a waterfall. A preferred return is an order of distribution, and it may never be paid if the cash never appears. Calling the preference "guaranteed" is the mix-up that hurts the most. Nothing in an 8 percent preference guarantees an 8 percent result. It guarantees, at most, that some other distribution waits in line, and only if the agreement actually says that.

People also treat "both sides have equity" as if it meant the same incentives. In the hypothetical the sponsor has $1,000,000 at risk and a fee stream and a promote. The capital partner has $9,000,000 at risk and a 70 percent residual share after preference. A quick sale that returns capital and pays a fee can look different to each of them from a longer hold that might feed the promote. Alignment is not a mood. It is the answer to a specific question: on this decision, who gains and who pays? Ask that question about a sale, a budget increase, and a refinance. You may get three different answers. That is a reason to keep the questions separate.

Another mix-up is importing a stabilized cap rate into a development as if it were the development's result. A finished building may be valued one day by capitalizing its income. During construction there is no that income. The relevant figures are cost, the loan, the remaining equity, and the time. The exit assumption belongs at the end of the model, after lease-up, not in place of the construction budget. A slide that shows only a completed cap rate has skipped the years in which the venture can fail.

What the agreement cannot prove

The agreement cannot prove that the project will be built on budget or on time. It can say who bears an overrun. It cannot pour the concrete. Entitlements, weather, a lender's draw conditions, and the leasing market sit outside the signature block. A careful model shows a budget, a contingency, and a case without the contingency. The agreement shows who funds the case you did not like. Neither one produces a tenant.

The agreement cannot prove that the partners will agree when the major-decision list is tested. A veto can prevent an action. It can also freeze a project. A forced sale or a buy-sell clause, if one exists, is a procedure, not a price. Read the procedure before you describe the venture as having "a clear exit." If the clause prices the interest off a formula, test the formula with hypothetical numbers, including a number the other side would dislike. A formula that works only when everyone is happy is a weak description of a dispute.

The agreement cannot prove a track record for anyone named on a website. This hypothetical $20,000,000 project is not a project of Suneet Singal, and the page does not say he is a sponsor or a capital partner in any venture. The career record is the dated officer history. Use the waterfall sketch to read an agreement you actually have. If the draft and the sketch differ, follow the draft and redo the arithmetic. The sketch was only there to make the sequence visible.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

This page is a reference, not investment advice. The loans beside the equity are explained in senior debt and mezzanine financing, and the documents that test a site before capital is committed are in real estate due diligence.