Joint ventures gain a firm foothold
Joint ven-ture (joint ven'cher) n. way of life in commercial real estate. This definition may not have made Webster's Dictionary, but within the real estate industry it rings true.
Many of the large commercial projects built in the past two years, and still more on the drawing boards, are joint ventures between lenders and developers.
For example, the Metropolitan Life Insurance Company on July 20 announced it would form a $500 million joint venture with Metropolitan Structures, a large Chicago builder. And, on Sept. 14 Aetna Life & Casualty Company formed a joint venture with Marvin Davis, the new owner of Twentieth Century Fox Film Corporation properties, at a cost of $183 million to the insurer. Still smaller companies and developers have joined in as well. This week, A.P.A. Transport, a New Jersey-based trucking firm, announced a $7.75 million joint venture with a Fort Lee, N.J., builder, C. Raimondo & Sons Company, to develop a stretch of deserted New Jersey waterfront along the Hudson River.
Such joint ventures, says Leanne Lachman, president of Real Estate Research Corporation, a subsidiary of First Chicago Corporation, are now a fact of life nationally in the commercial real estate world. Ms. Lachman points out that institutional lenders such as pensions and insurance companies are less willing to make conventional mortgage types of loans on properties. Instead, they are asking for equity - a stake in the project - in return for their participation. Thus, they end up as the financial partners in real estate deals. The developers often bring properties and experience.
This was the case with Metropolitan Life and Metropolitan Structures. Met Structures owned some important properties in Chicago, which will become part of the joint venture. This includes several properties in Illinois Center in Chicago, an 83-acre lakefront project in downtown Chicago. Within the center, the joint venture will own the downtown Hyatt Hotel, four office towers, a condominium, and 40 acres of undeveloped land.
Also included in the deal are 1 South Wacker Drive, which is currently under construction, and the Mercantile Exchange, which is also under construction. Metropolitan Life also included some properties in the deal, including the Uniroyal headquarters building in Connecticut, a New York Telephone building in New York City, the Reynolds Metal Building in Richmond, Va., and the Indiana National Bank building in Indianapolis.
According to Glen E. Coverdale, senior vice-president at Metropolitan Life, the big insurer decided on Metropolitan Structures for their partner since ''we liked what they had done in downtown mixed-use land development.'' Metropolitan Structures, which has since changed its name to Metco Properties (the joint venture adopted the name Metropolitan Structures), had developed properties in Chicago, Aurora, Ill., and Montreal among other places.
Bernard Weissbourd, chairman of Metropolitan Structures, says his firm was interested in the deal since it allowed the company to increase its capital base , making it competitive ''around the country with the Canadian companies, which are more strongly financed than their US competitors.'' He figures with the $500 million in new capital, plus the borrowing ability of Met Life, the new joint venture will have ''unlimited staying power'' in tackling new real estate projects.
Mr. Coverdale says that when the big insurance company looks for a partner for a real estate joint venture, it looks for ''. . . people with a good standing and knowledge of their individual communities. We look for skills in specific types of areas, such as mixed-use areas which are complex and require a unique type of skill.'' On a much smaller scale, Met Life has been involved in joint ventures since 1968.
Metropolitan Structures likewise has been involved in joint ventures before, including projects with IC Industries, the Prudential Insurance Company of America, and Standard Oil Company. However, these were mainly on a building-by-building basis. This new project, says Mr. Weissbourd, will involve all new activity.
In the case of Aetna, the properties it became joint owner of included Fox's 63-acre studio site at Century City, Calif., the assets of Aspen Skiing Corporation, and the Pebble Beach Corporation, and some other properties.
Generally, the shift from lender to owner has come quickly. According to Ms. Lachman, the shift was triggered by the rise in interest rates in 1979. By December of that year the real estate industry was ''numb,'' and it remained dormant for eight months. At the same time, lenders, scalped by inflation, sought some way to keep their assets from shrinking. The joint venture seemed to fit perfectly.
The advantages of the joint venture is that it teams the developers, who are often long on ideas, with the insurance companies who have great financial staying power. For the most part, says Ms. Lachman, the joint ventures have worked out well since they combine ''some pretty professional developers with some pretty smart institutions.
However, when problems do develop, Ms. Lachman says, they usually revolve around money. ''The first problem,'' she says, ''is if construction costs exceed the budget.'' If that is the case, the institution often increases its financial stake since the developer is often short cash.
The second problem is if the building space doesn't lease as quickly as planned. ''You must continue to pay the operating expenses,'' says Ms. Lachman, ''and the money must come from somewhere.'' At this stage, the institution often buys out the partner.
A third problem arises if the investment turns out to be in the wrong location. In this case, the institution might become the sole owner of it or try to sell it to someone else.
Joint-venture marriages also aren't always made in heaven. Ms. Lachman warns ''the real estate industry has always been tricky and is full of alert entrepreneurial people who are on the watch for uninformed money. You have to be alert because real estate is a risky business.''