In a real estate partnership/shareholding, two or more parties come together to jointly own the investment. The parties can be any legal entities (individuals, limited companies, other partnerships, societies etc.).

Types of Partnerships

Specific to real estate, as the name implies, a REIT is an investment fund (sale of shares to investors) that owns, operates, or finances real estate with incomes from the various projects accrued for accounting to the various investors.  REITS can literally be termed just as incorporated businesses with a focus in real estate.

In a joint venture (JV) two or more parties who come together to pursue a specific real estate project or investment, usually of a temporary nature. Each party contributes capital, expertise, or other resources to the venture, and profits and losses are shared according to the terms of the partnership agreement.

This arrangement comprises, at least one general partner, and one or more other limited partners. The general partner manages the investment and has unlimited liability, while the limited partners contribute capital but have limited liability.

Each partner has equal control over the investment and shares in the profits and losses, with each also personally liable for the debts and obligations of the partnership.

Multiple investors pool their resources to invest in a real estate projects. The crowd-funding platform typically manages the investment and handles the distribution of profits. This model differs from REIT in that crowd-funding may involve very small deposits. Various types include: reward-based, equity-based, debt-based and donation-based (those funding account for their donations as CSR projects, usually for socially beneficial projects with a little or no profit motive by originators).

Investors have various objectives that may comprise:

1. Investment Risk Containment: The risks accrue from the capital intensive nature of real estate investments, presenting significant risks.
2. Capital mobilization: Contributes to better investments in both nature and location. .
3. Access to a wider network and skills: Joint ownership enables investors to benefit from their varying different skill, ideas expertise and contacts.
4. Ownership of investments without having to engage in the daily grind of running the business. With bigger investments, professional management is usually feasible, hence facilitating none-engagement by owners.   
5. Statutory benefits: As an example for Kenya Real Estate Investment Trusts (REITs) confer exemptions from the capital gains tax, if they invest through a partnership structure.

Drawbacks / Disadvantages Of Real Estate Partnerships

1. 1. Lack of Congruence: Shareholders may have different ideas on the strategy and operations, which may affect the business decisions.
   2. Limited control: Accrues from the democratic nature of decision making.
   3. Legal complexities: Relate to documentation of the ownership structure.
   4. Where the ownership is not structured as an incorporated business with shares, liquidation / exiting the partnership may be constrained.  

Key Considerations for Successful Partnerships

1. 1. Partner selection: Partners need diverse skill sets, matching investment goals, and a shared vision of the project.
   2. Investment Goals: Consider the investment horizon, ROI and type of engagement.
   3. The Ownership Form:  Includes decisions on whether the company is to be carried on as a partnership (risky for liability purposes), private or public limited company, and containment to shareholding to avoid dominance by any one party.
   4. Formalization of The Company:  Consider legal support in formalizing and documenting key structures, profit sharing and corporate governance requirements / decisions. Dispute resolution mechanisms are also considered here, not with-standing divestment and/or liquidation guidelines.
   5. Risk management: Tied to corporate governance principles and decision hurdle rates that may be established. This also include risk delegation in form of insurance.
   6. Investments and Working Capital Management: Plans need to be in place, including identification of resource partners.
   7. Management structure: Will include the identification of key decision makers and daily operational management. Committees need be considered for various key tasks.

Final Word

Real estate partnerships, just like any other venture, require a mesh between the partners’ ideals and goals, together with high levels of individual integrity.

It is imperative that partners bring on added value to the table, including skills and ideas.

The structure of the company, supported by a legal framework, will also facilitate a successful venture with adequate protection of the various interests.

Sam Kagiri-23/02/2024

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