Issues in Joint Venture Capitalization
by Dean Pappas and Hamilton Tran
Dean Pappas is a partner
in the Los Angeles office of
Goodwin Procter and can be
reached at (213) 426-2525 or
dpappas@goodwinprocter.com.
Hamilton Tran is an associate
in the Los Angeles office of
Goodwin Procter and can be
reached at (213) 426-2528
or htran@goodwinprocter.com.
Defining Capital Requirements
Because real estate joint ventures are typically formed concurrently with an acquisition of real property or at the inception of a development project, venture partners understandably focus on the initial capitalization necessary to acquire the
property or complete the development of the project. But
what if additional capital is required to satisfy unanticipated
needs after acquisition or development? For example, in the
current market, ventures may have difficulty refinancing existing
debt that comes due at the same loan-to-value ratios that
were customary when such debt was first obtained.
In analyzing matters related to the funding of additional
capital, partners should carefully consider:
• Who will have the right to determine whether additional
capital is needed or to “call” such capital, and should any such
capital call require the prior approval of the other partners?
• If a partner is an investment fund or other entity whose
authorization to enter into the venture is limited to a maximum
As the allocation of global investment capital to
real estate has increased in recent years,
joint ventures between capital partners and developer partners have become commonplace in real
estate transactions, making joint venture agreements familiar real estate documents. Familiar as
they may be, however, many joint venture agreements overlook or do not adequately address
critical issues that often arise during the joint
venturerelationship. Onebasic but significant
provision found in joint venture agreements is
capitalization – the funding of the venture by its
partners. Capitalization will become even more
significant in the current volatile real estate and
credit markets as traditional debt financing
becomes scarcer and the infusion of equity may
be the only means to sustain joint ventures.
dollar amount, how will the obligation to fund additional capital
affect such authorization and should such entity’s capital
obligations be capped?
• Should additional capital funding be optional or obligatory? If optional, how will the venture secure any cash that
is needed to sustain the venture and its business? If obligatory,
what will be the remedies for the failure to make a required
contribution?
There are no standard or simple answers to these questions.
The resolution of these issues will vary from one venture to
another depending on the nature of a venture’s assets and
its business and the identity and bargaining leverage of the
partners. However, as the recent radical and rapid shift of
the capital markets shows, partners must anticipate the
unexpected and thoroughly consider and address each
of the questions above, and others, when negotiating
their joint venture agreements.
“Capital to sustain a venture is a paramount
concern for the venture’s viability....”
