This was a very interesting article that shed light on the practices regarding joint venture relationships within real estate. The article focuses on the idea that real estate managers are “misappropriating” funds from performing, cash-flowing assets to help underlying assets that are distressed within the portfolio. The concept of “robbing from Peter to pay Paul” is the crux of a ponzi-scheme (I state this in the lightest sense) and I do not agree with managers that believe this is a viable way to run a business. The “lax” attitudes that were seen throughout the real estate run-up should be targeted as inappropriate and likewise punished in order to spur investor confidence in this fragile real estate market.
The article explains that many of the older partnership documents are no longer viable for the complex real estate world that currently exists. If there is anything I have learned over the past 5 tumultuous years (has it really been that long since the downfall?!?!) is that the money paid to create ironclad documents, with a trusted real estate council, is pennies on the dollar compared to a class-action lawsuit. Do not get me wrong, as I am in no way shape or form a pessimist towards new deals/partners, but I have seen a lot of intriguing situations where people will jump towards litigation once a deal turns sour.
In this day and age it is difficult to find partners and people who are both trustworthy and loyal. In all real estate deals there is a certain component of risk and it is essential to have a team that works towards the resolution of these problems. There is enough risk simply in the transactional components of the deal, and by choosing the wrong partner it could be one of the largest unseen risks. John Stein, of Joshua Stein PLLC, states “…according to partnership law, one partner cannot sue another based solely on one issue. So even if a partner finds out the cash was taken from one partnership to fund another, there is no legal recourse to ask for a judgment unless they find something else wrong. Courts don’t want to get involved with partnership administration until it gets to the point of divorce.” Back to my point, if you are going to partner up on deals make sure you are willing to “get old” with those partners rather than ending up like 50% of America and divorced.
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