The term sheet says JV but it reads like a syndication to me

Question

An operator I've been talking to sent over a two page term sheet for a 48 unit deal. Top line says "JV equity partnership." Then the terms are 90/10 contributions, 8% preferred return, 70/30 split above that, and a paragraph listing what needs my consent (sale and refinance, that's it). At the bottom it says subscription documents to follow.

Somewhere I read that a JV partner negotiates the document and an LP signs whatever they're handed. If subscription docs are coming, am I an LP with a fancier label? I'm not upset about it either way, I just want to know which set of questions I should be asking before I keep reading.

Rena Guide · Accepted Answer

A joint venture capital provider supplies the equity in a partnership with an operating partner who brings the deal and does the work, and the terms of that partnership get bargained deal by deal. The negotiation is the defining feature. You and the operator sit down over decision rights, the waterfall, what happens if the plan slips, and the document reflects that back and forth. A limited partner in a syndication receives a document that was already drafted for everyone and either signs or passes.

That's the strict meaning. Loosely, plenty of people in the market say "JV equity" for any outside equity in a deal, including a $50k passive check, so the label on a term sheet tells you very little.

The test on your page is whether the consent list is negotiable. Ask for consent over the annual budget, over capital expenditure above a set dollar figure, and over any change to the business plan you underwrote. If the answer is yes and the lawyer marks it up, you're in a JV. If the answer is that the terms are fixed because other investors are coming in on the same paper, you're an LP and should read it as one.

The part that catches people either way is getting out. A partnership interest in a single deal has no market. Transfers usually need the other partner's consent, and there may be a right of first refusal at a formula price. Ask what happens if you want your money back in year three, and ask whether you can be called for more capital, because the answer to both is in the document rather than the term sheet.

dmitri_v6 · Answer

Sale and refinance only is thin. That means the operator can cut the renovation scope in half, change the unit mix, sign a ten year management contract with an affiliate and never call you. I'd want the annual budget on the consent list with a variance threshold, and I'd want to know how "cause" is defined in the removal section. Nine times out of ten it's drafted as fraud and gross negligence, which means missing every number in the plan isn't cause for anything.

hannah_west29 · Answer

Run the fee stack before you argue about consent rights. If that 70/30 sits on top of a 3% acquisition fee, an asset management fee on invested equity and a construction fee on the capex budget, the operator's cash from fees can beat their promote on a mediocre outcome. On a $4M equity deal a 3% acquisition fee is $120k on day one against a $400k co-invest. So a third of their money back before anything happens. That's what I'd want explained, not the split.

marcus_hale41 · Answer

Ask for the deal that went sideways. Every operator has one. If they hand you three references who all made money, call the lender and the property manager instead, and ask whether draw requests came in on time and whether budgets got re-forecast. Nobody lies to you about that stuff the way they do about returns.

stephen_ok9 · Answer

Is there a check size where you actually get bargaining power? I've been assuming somewhere around a million you're still taking their paper and somewhere north of that you get a real markup, but I don't know if that's a number or just how much they need you.

raj_mehta14 · Answer

I thought JV meant the two sides split it 50/50. So 90/10 with a pref on top is still a joint venture? I've been reading about this from the paper side and the vocabulary keeps sliding around on me.

jordan_ellis2 · Answer

Half the deal emails in my inbox say JV equity and mean "send money." One had a page of returns and no operating agreement at all, and when I asked for the LLC docs the answer was that they'd be ready at closing. @fathom at least yours put the consent rights in writing where you can argue about them.

The term sheet says JV but it reads like a syndication to me

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