Programmatic JV vs. Deal by Deal - Pros/Cons?

LPs generally want to secure deal flow, so this is usually advantageous to them since they are locking in a ROFR on your future pipeline. The challenge comes with cherry-picking deals—said another way, can they say no to future deals and you’re out finding a new partner? If that’s the case, I’d limit the number of times they can say no before you’re free to shop your deals elsewhere. 

Working relationship is critical—particularly on the first one. What if they are terrible to work with? You don’t want to get stuck as an indentured servant.

Evaluate the benefits at play from going programmatic, vs doing the first one and seeing how it goes. Chances are if it feels good, and the partnership is working, you won’t need a piece of paper to lead you to do another deal together.

I have seen it (and done it) both ways. There is no one size fits all, but generally in the programmatic world with PE firms, you end up as a very well paid acq/AM guy who gets your own brand.. which isn’t a bad setup.

Similar to another comment- I did a deal with a big LP, I know what they like and I feel confident they will do more deals with me as I bring them, but I am not locked into some formal relationship. Those ROFO’s can pretty quickly swing out of your favor unless you are pursuing a singular roll up strategy that requires constant transactions. If you are fishing for good, big deals 2-3 times per year the benefit of a programmatic relationship goes down.

You will also likely end up with having your investments crossed in some way - so will be a while before you start getting paid a promote. 

I think the biggest benefits are (I) providing coGP and lp equity, and (ii) extending liquidity runway while the firm grows revenue streams.

If you are already able to do the equity piece yourself and aren’t worried about personal liquidity, then I would agree it’s probably not worth it for you. You will probably give up economics relative to your current deals without receiving much in return. 

I’ll also note that many equity providers are still gun shy on deals in this market, even with jv, so I think the “pressure to deploy/do shittier deals” is misplaced. You will go from pitching friends/family to arguing over rent comps, expense assumptions, etc with real estate professionals

What kinds of deals are you doing (dev/acq)? What are your fees and promote hurdles? I would note the following critical question:

1. Do you like them as people--would you enjoy getting a drink with them after work? Do you trust them? This is way more important than you think. You want a partner who is going to work with you and see the bigger picture, not pull out the legal docs every single time you are dealing with a cost issue or problem. I have dealt with the "doc puller" before and it is an absolute nightmare. Conversely, we have some great partners who we have navigated major issue with and have only referenced the JV docs a few times and it has made a world of difference.

Pros: "proven" buyer with much greater cache in the market and ability to close as a qualified buyer. More consistent fee stream. Potentially easier path to establishing brand and balance sheet. Financial support to build out systems that are expensive to put in place initially but can last 10+ years once in place. You know your risks re-cost overruns, predev spend, major decisions, etc. instead of worrying about them on every transaction. Can focus on deals instead of capital raising. 

Cons: diluted upside (can weigh in if you can share structure). "stuck" with their investment strategy/mantra. reporting requirements. limits opportunistic ability to specific "buy box" LP is looking for. 

In my opinion, the development business in particular is changing. Smaller shops are getting boxed out and LP capital is increasingly looking for and funding bigger, established operators with vertical integration, built systems, etc. Having a programmatic LP is a big win that you should strongly consider if you like and trust them as partners. 

Kind of tangential but make sure you clearly document how the ROFO strikes are counted. You’d think LPs will just let you off the hook if you are no longer aligned / the relationship is no longer mutually beneficial but you never know.

Make sure you really dig in and understand the economics of a crossed waterfall. Our firm has done programmatic JV's and we will be making less promote with the crossed waterfall than if were to do the same deals one by one. One deal that you hold for longer or doesn't succeed, can take a real hit on the larger promote number. 

Someone also mentioned this but you also need to understand that there will likely be no promote coming back to you after your first deal as the profit will flow through the waterfall as return of capital and that promote check will come after another deal. 

But, if you hit all your deals out of the park, you will likely (depending on structure) end up making more promote at the end because you are returning capital on your other deals quicker (higher IRR). There really are pros and cons you just need to fully understand the waterfall economics of what you are signing up for.  

I think it is hard to give a definite answer as I was not at the firm when the first programmatic JV started and I am not a partner at our firm (no skin in the game).   

One way we did minimize risk is splitting up the initial programmatic offer into two JVs, so we have two different programmatic JV's. Amongst all the other recommendations above, I would see if this is possible. I wouldn't limit the JV from a shot clock/timing angle, but from a deal angle. If they want 4 deals in this programmatic JV, you may offer to start with two or three - this can almost be like a trial run. 

The ability to close on deals with a capital partner at any point in the process will set you apart from competitors and will thefore give you better access to deals, but there is the chance those deals trag down your waterfall IRR.

There really are pros and cons but this is one pro that does make us a top-tier sponsor in our market because brokers/sellers understand we have the ability to close on land/assets with a large amount of capital support. 

OP - I'm an attorney that does a lot of PJVs, shoot me a DM if you want help on the legal side of things

Is there any reason why you wouldn't try raising a small first fund for yourself? Call it a $10-15M fund with the existing institutional LPs and same business plan but going for scale instead of raising deal-by-deal? Would assume you can get similar waterfall incentive as the deals you've already done on a deal-by-deal basis in addition to getting the salary overhead, which seems to be the appeal going the programmatic JV route. 

I am on the board of one of the economic development entities for my city. This is a glorified way of saying, in addition to my own real estate investing, I have significant insight into real estate market for a t-3 city.

I strongly recommend going the co-GP route. The most important thing to do is to develop a track record. Once you can show you can successfully run deals, everything becomes way easier. Like someone above said though, make sure you clearly define the co-GP’s rights. For example, if they refuse to do the deal, you should be allowed to shop it around.