Joint Ventures in Commercial Real Estate: Aligning Capital, Control, and Risk

Andrew Prochnow

Joint ventures are a common structure in commercial real estate, particularly for development and value-add projects. They allow parties to combine capital, expertise, and risk in ways that single-owner structures often cannot. At the same time, joint ventures introduce governance, control, and exit issues that—if not addressed early—can derail otherwise successful projects.

In California commercial real estate, joint ventures succeed or fail less on economics than on structure. Clear agreements that align incentives, authority, and risk are essential to long-term stability.

Why joint ventures are common—and risky—structures

Most real estate joint ventures pair different strengths. One party may contribute capital, while another brings development experience, operational expertise, or market access. When structured well, this division of roles can accelerate projects and unlock opportunities that neither party could pursue alone.

The risk arises when expectations are assumed rather than documented. Informal understandings about decision-making, capital contributions, or exit rights often break down once a project encounters delays, cost overruns, or market shifts. At that point, the governing documents—not prior conversations—control the outcome.

Joint ventures are most vulnerable during:

  • Construction delays or budget increases

  • Capital calls beyond initial projections

  • Disagreements over leasing or disposition timing

  • Changes in financing terms or market conditions

These moments expose weaknesses in governance and risk allocation.

Entity selection and governance fundamentals

The foundation of any joint venture is the entity through which it operates. In commercial real estate, this is most often a limited liability company or a limited partnership.

LLCs vs. limited partnerships in real estate joint ventures

LLCs offer flexibility in management structure, tax treatment, and economic arrangements. Limited partnerships may be preferred in certain institutional or tax-driven structures but often require careful drafting to balance control between general and limited partners.

Entity selection should reflect:

  • Financing requirements

  • Tax objectives

  • The parties’ desired level of control

  • Exit and transfer considerations

No structure is universally correct; the wrong choice can complicate financing or restrict future options.

Manager-managed vs. member-managed structures

Governance hinges on who has authority to act. Manager-managed structures are common when one party handles day-to-day operations, while others remain passive investors.

Clear definitions of authority reduce friction by answering questions such as:

  • Who can sign leases or loan documents

  • Who controls budgets and construction contracts

  • When investor consent is required

Ambiguity in these areas often leads to disputes at critical stages.

Capital contributions, waterfalls, and economics

Economic terms define how returns are allocated—but they also influence behavior.

Initial capital vs. future capital calls

Joint venture agreements should clearly define initial capital contributions and address whether, when, and how future capital calls may occur. Failure to plan for additional funding needs is a common source of conflict.

Agreements should address:

  • Whether capital calls are mandatory or optional

  • Consequences for failure to fund

  • Dilution or default remedies

Preferred returns and promote structures

Waterfall provisions allocate returns based on performance thresholds. While these structures align incentives, overly complex waterfalls can obscure outcomes and create misunderstandings.

Clarity is often more valuable than complexity. Parties should understand exactly how and when returns are distributed under different performance scenarios.

Aligning incentives without overcomplication

Well-structured economics motivate performance while preserving transparency. When parties fully understand the financial mechanics, disputes are less likely to arise during periods of stress.

Control rights, consent thresholds, and protections

Control provisions often matter more than economics once a project is underway.

Reserved matters and major decision rights

Joint venture agreements typically designate certain actions as “major decisions” requiring investor consent. These may include:

  • Incurring or modifying debt

  • Approving budgets beyond thresholds

  • Selling or refinancing the property

  • Amending key documents

The scope of these rights must balance investor protection with operational efficiency.

Minority investor protections

Minority investors often require consent rights, reporting obligations, and access to information. These protections preserve transparency without undermining the managing party’s ability to operate the project.

Managing member authority in practice

Too much restriction can paralyze a project; too little can expose investors to unacceptable risk. Effective governance strikes a balance that reflects each party’s role and exposure.

Exit strategies and dispute planning

Exit planning is not pessimism—it is risk management.

Buy-sell provisions and valuation mechanics

Buy-sell clauses provide a path forward when parties no longer align. These provisions must be drafted carefully to avoid manipulation or unintended consequences.

Clear valuation methods reduce the likelihood of prolonged disputes.

Trigger events and forced exits

Agreements should address events such as:

  • Failure to fund capital calls

  • Bankruptcy or insolvency

  • Deadlock on major decisions

Predetermined remedies provide predictability during uncertain circumstances.

Why exit planning matters before capital is deployed

Once capital is invested and construction is underway, leverage shifts. Planning exits early ensures fairness and stability regardless of project outcome.

Conclusion: Structuring joint ventures to avoid disputes

Joint ventures can unlock significant value, but only when capital, control, and risk are intentionally aligned. Most disputes arise not from bad faith, but from documents that failed to anticipate real-world scenarios.

Careful entity selection, clear governance, thoughtful economic structuring, and well-defined exit mechanisms reduce uncertainty and preserve relationships. In commercial real estate, the strongest joint ventures are those designed to function smoothly not only when projects succeed—but when challenges arise.