What is the Difference Between a Joint Venture (JV) and Syndication in Real Estate Investing?
You’ve completed a handful of real estate investments on your own and are now ready to take your business to the next level by forming partnerships and raising capital to fund larger project.
However, before moving forward, you need to know what type of partnership you are allowed to legally form. That is, you need to know the difference between the two most common partnership structures: joint venture (JV) and syndication.
Before we dive into the differences between these two structures, a quick disclaimer – I am not an attorney and am not offering legal advice. I am offering general information for educational purposes. Ultimately, you need to consult with a real estate and securities attorney to determine which structure is right for you.
Is it a Joint Venture or Syndication?
Now that we got that out of the way, to determine whether you are forming a JV or a syndication, you need to take the Howey Test.
The Howey Test was created by the Supreme Court for determining whether certain investments qualify as “investment contracts” (or securities). The four parts of the test are:
1. It is an investment of money
2. There is an expectation of profits from the investment
3. The investment of money is in a common enterprise (that is, investors pool their money or assets together to invest in a project)
4. Any profit comes from efforts of a promoter or third-party
“It is an investment of money” holds true for syndications and JVs. Same with “there is an expectation of profits from the investment” and “the investment of money is in a common enterprise.” The main distinction comes down to part four – “any profit comes from efforts of a promoter or third-party.” If this is true, then it is an investment contract where you are selling securities and is therefore a syndication. If this is false, then it may be a JV.
If it is a Joint Venture…
…then the investors have an active role in the ongoing management of the project. There role must be more than just the right to vote. They must have a defined role and you must be able to prove that they actually fulfilled those duties.
A JV is when two or more individuals or companies pool resources to accomplish a common goal and where all parties involved are managers in the deal. An example would be a general partnership on a syndication. Another example is if two individuals come together and do a fix-and-flip where both members have an active role in the project.
Since everyone is a manager in the deal, all parties have unlimited liability. Also, no single individual can make decisions on behalf of the group. It must be by majority or unanimous rule.
Compared to syndications, JV partnerships are much less expensive to form.
Overall, a JV is a partnership where all members have defined and active roles in the ongoing management of the real estate project.
If it is a Syndication…
…you are selling securities and must register with the Securities and Exchange Commission (SEC) and are regulated by securities law.
While the general partnership aspect of the syndication is a JV, the partnership between the general partnership and the limited partnership (i.e., passive investors) is a syndication. Unlike a JV, the syndication adheres to the fourth part of the Howey Test – “any profit comes from efforts of a third party,” with the third-party being the general partnership. The investors do not have an active role in the ongoing management of the project and are completely passive.
Compared to JVs, syndications partnership are more expensive to form since you must register with the SEC and create the supporting documentation with the help of a securities attorney.
Overall, a syndication is a partnership where the investors do not have active roles in the ongoing management of the real estate project.
It is vital that you consult with a securities attorney before forming a partnership to purchase real estate. If you form a JV when a syndication is the proper structure, or vice versa, the resulting non-compliance with securities laws can cost tens, if not hundreds, of thousands of dollars in litigation fees, result in SEC fines, and even jail time.
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.