The Construction Joint Venture (JV) has been formulated by Pacific Horizon Financial in 2014 as a way to provide worthy Developers a capital source for small, infill residential construction projects in San Diego, CA. Most banks are still not making construction loans and those that are, demand a formidable balance sheet and normally, a prior relationship.
Construction lending is difficult and typically the best scenario for the lender is to get its stated yield. The other side of the coin is a lackluster return, or even a loss, after a great deal of effort and oversight. Based on the losses incurred by banks after the 2008 collapse, few institutions perceive that the risk/reward ratio is adequate and they continue to abstain from the construction lending sector.
Therefore, Developers/Contractors who would like to build while the market is good, suffer from lost opportunity while most banks remain paralyzed.
The solution - and opportunity - for both Lender and Developer is to align their interests by getting on the same side of the table (or pulling in the same direction) and rethink the concept to provide more yield and safety.
This is accomplished with the Pacific Horizon Financial Construction Partner JV. There are 3 partners in the Joint Venture:
1. Capital/ Lender Investor
2. Developer/ Entrepreneur
3. Manager/ PHF
Capital/ Lender Investor:
Capital provides up to 90% of the funding for the project and has the following attributes:
o The priority similar to a 1st TD and a yield between a 1st TD and an equity participation (14-20%).
o The control of ownership without the headache, Pacific Horizon takes care of management of the project, Fund control(by a 3rd party), accounting, etc. Additionally, Pacific Horizon’s compensation is based solely on its share of profit. No Profit, No Compensation.
o The safety of not having to foreclose or suffer through a borrower’s bankruptcy or being individually named in the unlikely event of litigation.
Developer/ Entrepreneur:
The Developer provides the sourcing, planning, at least 10% of cost, supervises the construction and sale of the project and has the following attributes:
Manager/ PHF:
The Manager brings the Capital and the Developer together and has the following attributes:
- Manager is not the controlling Member of Capital, the majority of the Capital LLC members control it, but Pacific Horizon will provide administrative support for the Capital LLC.
- Manager provides initial structure and underwriting of the project. Manager has one vote as to matters concerning the JV.
- Manager's compensation is based solely on profit. No profit, No fee. Manager has every motivation to ensure that only highly predictable and profitable projects are undertaken. Lots of work for no compensation does not a happy Manager make! (Manager is paid a small initial draw against profit that is refundable in the event Capital does not earn a profit.)
Thus, the Construction JV offers a path of greater safety to all parties and an adjustment of the feast or famine returns to a more equitable arrangement. Capital is handsomely rewarded with minimized risk; Developer can profit from good projects with minimized risk and Manager makes money only when Capital makes money. It provides a mechanism where the parties work as a team and make the most from what they contribute.
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