By Bradley W Submitted On June 23, 2014
Qualified land investment joint venture partners a lynchpin of smart investing.
The history of land investment and developed real estate are instructive. Having the right joint venture partners is a key component.
In the UK, Canada and American real estate circles, the 1980s story of Olympia and York (O&Y) is often cited as a lesson learned. The highly-capitalized firm ran into an unfortunate set of circumstances with its Canary Wharf (London) and Manhattan properties in the late 1980s and early 1992, ultimately declaring bankruptcy with $20 million in arrears to various banks and investors.
The family running the firm, the Reichmanns, were seasoned real estate professionals. However they were overleveraged in two markets that were going through a pronounced slump. Their story provides a sobering picture of how even experienced investors can get involved in property and land investments that sometimes fail spectacularly.
Still, real estate in general is the means by which many of the world’s greatest fortunes have been built. And it’s not a game of Monte Carlo-like chance: there are key characteristics of joint ventures in land that increase investors’ odds of achieving asset growth. They include:
• Experience in the type of land investing being undertaken – There are many ways to invest in real estate: existing commercial properties, raw land, industrial warehousing, residential development and real estate investment trusts (REITs). One or several partners in a joint venture should have expertise in the type of investment where you put your money.
For example, a raw land investment would best be managed by professionals who understand how to turn otherwise dormant property (or what might be currently used for agriculture, for example) into viable residential development. This requires acumen with local planning commissions, being able to judge the likelihood of a zoning change that would benefit the local economy. It is not a task for amateurs.
• Shared ROI interests – Some investors expect a return on their investment in one year. Others are patient to wait two, three, four or five years or longer. What doesn’t work is when a joint venture partner is on a different schedule and therefore wishes to exit the investment early. Investment managers should be able to project when a real estate investment will provide an optimal payout – and then deliver on that projection.
• Appropriate allocation of funds (e.g., focus on a single property) – To avoid the mistake made by Olympia and York, it is important that the fund investment managers have a demonstrable track record of success. Just as important, their funds and managerial attention should be focused on properties where economic factors are promising. For example, in the UK market a growing population and under-investment in the housing stock during the past ten years is driving high demand for housing. Whether those properties are built for sale or to let is a matter for further discussion, but suffice it to say people need to live somewhere and that need shows no sign of abating.
Ultimately, remnants of O&Y recovered some of the company’s fortunes in the UK and Canada (but not the US). They and their investors learned their lessons – and prove once again that great fortunes can be achieved with real estate and land investment.
Be certain to work with a personal financial planner when considering any type of investment, be it in real assets or traditional market-traded securities.
There are key characteristics of joint ventures in land that increase investors’ odds of achieving asset growth. For example, a raw land investment would best be managed by professionals who understand how to turn otherwise dormant property.
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