Do you like pi?a coladas?
“If you like pi?a coladas, and getting caught in the rain …” Pardon the reference to the inexplicably popular 1970s song by Rupert Holmes about a couple surprised to discover what they secretly have in common, but I heard it on the radio on my way home from the office after a long day negotiating a JV agreement, and it underscored how important it is to know your JV partner up front.
We are handling more joint ventures right now than at any time in recent memory. With the right partner(s), JVs make a lot of sense and can be useful in achieving many different objectives. They can, for example, provide necessary financial wherewithal, development expertise, instant increased distribution, access to a very desirable acquisition opportunity, risk diversification and local presence, reputation and influence. Although banks are ? at last ? loaning again, the quality of the sponsorship is extremely important, and a good JV partner can help secure better terms, while a JV partner of lesser quality can make the deal more expensive, onerous or even impossible.
JVs are more than just an agreement concerning priority of cash distributions and control over decision making (although these items are among the most important issues to resolve early in the relationship). They are, typically, a multi-year commitment to one another, not to be rushed into blindly. What do you know about your potential joint venture partner? When the initial attraction of the ample balance sheet, impressive contacts or portfolio of properties has faded, it’s important that there is a foundation of common understanding and that the partners are likeminded in their approach to the relationship and the project. Do your homework and ask questions. What is the reputation of your partner in its own community? Does your partner really have the contacts and influence it claims? Is your partner litigious? How has it reacted when past projects have encountered difficulties ? has it worked things out or left a trail of unhappy lenders/partners/governmental officials? Does your JV partner have a good relationship with the brands, or would he or she be disqualified from owning a branded hotel on account of the provision in some hotel management agreements that permit the hotel manager to withhold consent to a transfer because “of a prior unsatisfactory relationship with the hotel manager”? The matters to be concerned about will likely vary from deal to deal. Obviously, your approach is going to be very different if you, your partner and the project are all located in London than if you are in New York relying on your partner to develop a hotel half a world away in Central Asia.
As a lawyer, part of my job is to help my clients identify what is and is not important to them and help them ask the right questions to make sure that there is a level of compatibility between prospective partners that will allow them to have a successful relationship. Maybe you don’t like pi?a coladas; perhaps you prefer a glass of wine. Maybe the idea of getting caught in the rain sounds like a cold, soggy mess. Just make sure that before you finalize your deal with your joint venture partners you know who they are, how they think and how they are likely to behave. It could save you a little heartache and a lot of headache later on. When it comes to the joint venture documents, I always apply one of my favorite sayings: “the rules of the game determine the outcome.” Trust me … remember this!