Exam 202. Creating and Profiting from Joint Ventures

Buy Outs Q3

A common approach used to establish the buy-out value is to use the "Formulae Approach", where a specified formula is used to calculate the buy-out value. If the buy-out formula is:


Calculate the buy-out value using the following information:
Net Operating Income (last year): ${a}
Net Operating Income (previous year): ${b}
Cap Rate: 7%
(Round your answer to the nearest dollar. No Commas)

Buy Outs Q4

Often in joint venture arrangements a formula, which uses a "weighted average" for calculating the Net Operating Income (NOI) is used to determine the "Buy-out Value" such as:

Calculate the weighted Net Operating Income using the following information:

The Net Operating Income (NOI) for 2014 is ${a}.
(Round your answer to the nearest dollar. No commas)

Buy Outs Q8

With land developments there are "Unknowns" that will later become "Knowns". As an example, the number of condominium units that the City will approve. Where we have "Unknowns" that become "Knowns", a formula can be used to estabslish the buy-out value.

A developer is offering a land owner a base price of $2,000,000 plus and extra ${a} for every unit the City approves over 25 units.

Calculate how much the developer will pay the land owner if the city approves {b} units.

(No commas)

JV Framework Q7

Calculate the funds available to distribute to the co-venturers when the property is sold using the folowing information:

Sale Price
Outstanding mortgage balance
Real estate commission
Closing costs
Equity contributions
(No commas)

Source and Use of Funds Q2

A manufacturer wants to buy some industrial land and build an industrial building. He will occupy the building and pay market rent. Unfortunately, he doesn't have enough capital and needs an equity investor. Based on the following information, how much money is required from the investor?
Land Cost: ${a}
Development Costs: ${b}
Legal & Other Costs: $50,000
First Mortgage: $1,500,000
Equity. Manufacturer: $400,000

What is the equity required from an investor? (No commas)

Buy Outs Q1

Is this how a shotgun clause works?
Partner A offers to buyout Partner B for $750,000. Because Partner A has initiated the offer, Partner B has to sell to Partner A for $750,000. {#1}

Partner A offers to buy out Partner B for $750,000. Partner B can accept the offer of $750,000 from Partner A or he can reject the offer and buyout Partner A for $750,000. {#2}

The goal of a shotgun clause is to ensure that the partner making the offer makes a fair rather than low ball offer. {#3}

Complex Investments. Analysis Q3

Complex investments such as real estate syndications are {#1} to analyze and are {#2} risky than a straight forward purchase of a similar property.

Complex Investments. Analysis Q4

It is {#1} to sell an interest in a syndicated investment at a really {#2} price because the potential buyers are the remaining syndicate partners.

JV Analysis Q1

In developing a joint venture to buy a rental apartment building where co-venturer A is putting up 60% of the equity and 40% by co-venturer B, you get the following financial results when analyzing the joint venture:

Co-venturer A Internal Rate of Return (IRR): 7%
Co-venturer B Internal Rate of Return (IRR): 13%

Do these results suggest that you need to figure out another arrangement that is fairer to both parties
 If you increased the equity provided by Co-venturer B would this cause a more balanced return for Co-venturer A
Would negotiating a more favourable mortgage create a more balanced return on investment assuming everything else remains the same
Would increasing the share of the operating cash flow to Co-venturer A create a more balanced financial result
Would increasing the share of the sales proceeds to Co-venturer B after paying off the mortgage, selling expenses and returing the equity contributions make it better or worse for Co-venturer A

JV Framework Q13

If this investment was being considered for a joint venture and the co-venturers desired return (IRR) is 13% before tax, what is the maximum price that can be paid by the joint venture for the property?


Answer: ${#1} (No Commas)

Mutually Exclusive Analysis JV Q2

A family who is currently renting a home is considering buying the home to live in and as a long term investment. The husband is a CPA (CA) and is familiar with investment and cash flow analysis. He was dismayed with the investment return (IRR) which was 3%. Complete the following:

Promoting a JV Q1

Care has to be taken when promoting a joint venture to ensure you do not breach security and other related acts. The general rules are:

Promoting a JV Q3

If a promoter of a real estate investment manages and controls the investment, and the investors only decision is to invest, then this is likely to be recognized by the courts as a {#1}.

Waterfall Distributions Q8

Complete the following sentences:

Waterfall Distributions are {#1} to evaluate.

Over the life of the investment the promoter generally receives a {#2} return (IRR) compared to the equity investors.

An 8% preferred return always means that the equity investor will receive 8% interest every year on their equity investment. {#3}

The "Equity Investors" have the same voting rights as the "Promoter". {#4}

Buy Outs Q10

A "Timed buy-out" refers to:

Buy Outs Q11

What is the main advantage of a "Timed Buy-out"?

Buy Outs Q7

A land owner and a developer are considering entering into a joint venture to re-zone the land and then subdivide the land and sell the lots and share in the development profits.

Which would be the best option for the landowner from a risk perspective?

Complex Investments. Analysis Q1

Packaged investment opportunities can be very hard to analyze because they are complex and can be riddled with management and other hidden fees.

Which is the simplest and quickest approach to analyze whether the investment opportunity makes economic sense:

Complex Investments. Analysis Q2

Which statement is incorrect?

InvestorTenant JV Q1

From an investor's perspective there are a number of advantages of forming a joint venture with an Investor/Tenant who will occupy 35% of the building. Which of the following are not advantages for an investor forming a joint venture with an Investor/Tenant?

InvestorTenant JV Q2

There are many advantages for an Investor/Tenant forming a joint venture with an investor. Which of the following is not an advantage for the Investor/Tenant?

JV Analysis Q2

You are trying to put a joint venture deal together which involves an "Investor/Tenant" who will also occupy the building as a tenant. In preparing for the next meeting would it be a good idea to figure out how much:

  1. Money the Investor/Tenant would need to buy out the investor at the end of five years.
  2. How much money the investor will receive if the Investor/Tenant buys him out.

JV Analysis Q5

Several friends are considering a joint venture to buy an investment property and have carried out an investment analysis, which shows an investment return of 12%.

Partner A will put up 70% of the equity and Partner B 30%. The sharing of the operating cash flows and sales proceeds will be based on their equity contributions. This structure will provide a return (IRR) of 12% for each of the partners.
Partner A is having second thoughts about this arrangement because he is putting up 70%, which puts him in a more risky position and would like a return higher than 12%. If he is given 80% instead of 70% of the operating cash flows and sales proceeds, will partner B's return (IRR) be:

JV Analysis Q6

Which is the best method to calculate the proceeds available for distribution to the co-venturers when the property is sold?


JV Framework Q10

Following are the results of an investment analysis. Will this investment also work as a joint venture if the co-venturer's desired return (IRR) is 10% before tax?


JV Framework Q11

Following are the results of an investment analysis for an office building. Will this investment also work as a joint venture if the co-venturer's desired return (IRR) is 11% before tax?

JV Framework Q12

Following are the results of an investment analysis for an office building. Will this investment also work as a joint venture if the co-venturer's desired return (IRR) is 11% before tax?


JV Framework Q14

The financial structure of a joint venture involves deciding how to balance the:

in a way that provides each co-venturer an acceptable return given their investment risk.

JV Framework Q16

Is this statement correct?
Each co-venturer will compare their return against other investment opportunities, including doing nothing, by taking into account the risks, rewards as well as effort and time involved. In other words "Try to think like they will think".

JV Framework Q17

When one of the co-venturers is a contractor and is constructing the building, the construction costs and contractor mark-up have to be tightly controlled. Which of the following are not methods for controlling the construction costs?

JV Framework Q2

Is it possible to set up a joint venture between two co-venturers investing in an income property, using the following arrangements?


JV Framework Q4

Is this the framework for analyzing and creating a joint venture arrangement? 

  1. Now. What are the equity contributions now and in the future.
  2. During. How the positive and negative cash flows and capital cost overuns will be shared.
  3. End. What happens when the property is sold. How will the sales proceeds be shared after:
      1. Paying off the mortgage.
      2. Paying the sales commission.
      3. Returning the equity contributions to the partners.
  4. Roles & Responsibilities. Who does what? How will they be remunerated and when will they be paid?

JV Framework Q5

A developer has a nice piece of land under contract where she wants to develop an office building. Unfortunately, the project doesn't seem to be economically viable, but she figures she can make it work by bringing in a joint venture partner.
Will this approach work?

JV Framework Q6

Is this the method recommended in the Joint Venture video and manual for calculating the distributions of the sales proceeds when the property is eventually sold?


JV Framework Q8

Is it possible to set up this arrangement between two co-venturers?


Co-venturer A
Equity 60%
Sharing of positive cash flows 60%
Sharing of operating losses 0%
Co-venturer B
Equity 40%
Sharing of positive cash flows 40%
Sharing of operating losses 100%

JV Intro Q1

Is this a reasonable statement of the characteristics of a joint venture? 

JV Intro Q2

Three individuals have formed a corporation to purchase a number of investment properties, which they will hold for the long term.
Is this a joint venture?

JV Intro Q3

Which of the following would not be classified as a joint venture?

JV Intro Q4

Which of the following best describes a joint venture where one of the co-venturers is also a tenant called an "Investor/Tenant"?

JV Intro Q6

There are many ways to form a joint venture. Which of the following are examples of joint venture arrangements.

Mutually Exclusive Analysis JV Q1

You are putting a joint venture together that involves an investor coupled with an "Investor/Tenant" who will occupy 100% of the space. From the Investor/Tenant's perspective should you:

Mutually Exclusive Analysis JV Q3

The following is an example of:


Mutually Exclusive Analysis JV Q4

Which of the following are not examples of a mutually exclusive investment decision?

Mutually Exclusive Analysis JV Q5

Is it true that in our daily lives, even though we may not be aware of it we are constantly making mutually exclusive decisions such as: 

Mutually Exclusive Analysis JV Q6

The process for analyzing mutually exclusive investments such as "Buy vs Lease" is to:

  1. Develop the Net Cash Flow of Buy
  2. Develop the Net Cash Flow of Sell
  3. Calculate the differential cash flow "Net Cash Flow of Buy - Net Cash Flow of Lease"

Source and Use of Funds Q1

Sometimes it is helpful to check if the financial arrangement is correct using a "Source and Application of Funds" statement to check that the "Source of Funds" equals the "Use of Funds".

In the example below, does the Source of Funds equal the Use of Funds?


Waterfall Distributions Q1

Waterfall distributions specify how the cash flow from operation and from the eventual sale are distributed between the " Promotor" and the "Equity Investors". Following is a "Waterfall" arragement.


There are several ways to handle the "Excess" operating cash flow after first paying the 7% preferred interest.

Option A. Excess operating cash flow is used to reduce the promoter and equity investors equities.

Option B. Excess operating cash flow is distributed as a "Profit"

Which option increases the return to the "Promoter"?

Waterfall Distributions Q2

Equity participation deals often involve using a "Waterfall" distribution, which specifies the financial arrangement between the "Promoter" and the "Equity Investors". Which one of the following is not an objective of the "Promoter" when using a waterfall distribution arrangement?

Waterfall Distributions Q3

The following Waterfall Distribution shows the Promoter putting up 5% of the equity but receiving 75% of the funds available to distribute. The "Promoters" big payday is when the property is sold.


The delaying of profits by the promoter until the property is sold is called:

Waterfall Distributions Q4

When a "Waterfall Distribution" includes a Preferred Interest of 7% this means:

What If Clauses Q1

An investor has formed a joint venture with a family to buy a home. The family will make the mortgage payment and pay the property taxes and the regular maintenance costs. They expressed concerns about who pays for major repairs such as replacing the furnace, roof or the hot water tank.

Which one of the following clauses best handles this "What If" question and is fair for both parties?

Buy Outs Q2

Establishing the value for buying out a co-venturer's interest for an income property is relatively easy because you can have an appraisal done by a qualified appraiser.

Buy Outs Q5

The Net Operating Income (NOI) and EBITDA (Earning before Interest, Taxes, and Amortization) are the same.

Buy Outs Q6

The term "Net Operating Income (NOI)" is commonly used in financial statements for corporations and the term "EBITDA (Earning before Interest, Taxes and Amortization)" is commonly used in commercial real estate financial statements.

Buy Outs Q9

For some joint ventures it is wise to set up an insured buy/sell agreement. If one of the co-venturers dies or is disabled there are insurance funds to buy-out the deceased co-venturers estate. Insured buy-sell agreements do not specify how to value the co-venturers interest.

Complex Investments. Analysis Q5

Rather than investing in a syndicated real estate investment it might be wiser to buy shares in a REIT or a publically traded real estate company because it's easier to sell shares in a publically traded company than interest in a real estate syndication.

JV Analysis Q3

Is this statement correct? If you increase the return (IRR) to one of the co-venturers you automatically decrease the return to the other co-venturer(s).

JV Analysis Q4

Is this statment related to joint venture arrangements correct?
"If you give more to one you have to take from the other(s)"

JV Framework Q1

A developer and a lender have formed a joint venture to build an office building on a prime site owned by the developer. The equity being provided by the co-venturers is:

Developer: 30%
Lender: 70%
This means that the development profit will be split based on their equity contributions:

JV Framework Q15

Joint venture analysis is a "Trial & Error" process where you guess a financial structure that you think might work and calculate the financial return to each co-venturer. If the arrangement doesn't work for one of the co-venturers you try another financial arrangement until you find one that works. The inputs that you can manipulate are: 

  1. Equity contributions of each co-venturer
  2. How the cash flow will be shared between the co-venturers
  3. How the sales proceeds will be distributed when paying off the first mortgage, paying the selling expenses and returning the co-venturers equity contributions

JV Framework Q3

The equity contribution of each co-venturer doesn't necessarily determine how the:  

will be distributed.

JV Framework Q9

Is the following statement correct?
If it won't work as an investment it won't work as a joint venture.

JV Intro Q5

There are a lot of opportunities for setting up joint ventures between a tenant called an "Investor/Tenant" and an investor.

JV Intro Q7

A joint venture is not a legal entity. There is no "Joint Venture Act".

JV Intro Q8

Joint ventures are controlled by a "Joint Venture Act" that varies depending on the "State" or the "Province".

Mutually Exclusive Analysis JV Q7

The best way to analyze mutually exclusive investments such as "Buy vs Lease" or "Hold vs Sell" is to carry out long term real estate investment analysis and calculate the Internal Rate of Return (IRR). There is another approach called "Differential Cash Flow Analysis" where you take the "Net Cash Flow. Buy - Net Cash Flow. Lease" which is called the differential cash flow but this approach yields an incorrect answer.

Promoting a JV Q2

The best way to find joint venture partners is to advertise in the newpaper and the internet offering an opportunity to invest in a real estate development.

Tax Legal Q1

A joint venture has been set up between a corporation and an individual to purchase an investment property. The property has been purchased and the mortgage put in place. The co-venturer, who is an "individual", didn't get legal and tax advice and his accountant advises him he would have been better off to have created a corporation, which invests in the joint venture.

It is relatively easy to change from an "individual" to a "corporation" and there will be no tax consequences.

Tax Legal Q2

Co-venturers can use a variety of "legal entities" to invest in a joint venture. They can invest as an individual, corporation or partnership. Before entering into the joint venture arrangement each co-venturer needs to get tax and legal advice ahead of time. Once a joint venture has been set it can be very costly to change the legal structure and the change may create tax consequences.

Waterfall Distributions Q5

The "Carried Interest" due to the promoter encourages the promoter to manage the investment in a way that increases the value of the investment.

Waterfall Distributions Q6

In "Waterfall Distributions" the carried interest benefits the equity investors more than the promoter.

Waterfall Distributions Q7

If a promoter has more than one property they may place all the properties in one fund called a "Whole Fund", sometimes called an investment pool. With a "Whole Fund" the promoter receives the carried interest for each property as it is sold.