That’s why it is important for commercial real estate professionals to make careful evaluations based on the facts and circumstances of individual development projects. Additionally, all financial activity between the joint venture and company should be eliminated, including any revenue recognized for work done for the joint venture.īear in mind that the specifics of every joint venture are different. If the answer is “yes” to these tests, all joint venture financial reporting should be consolidated. Once a joint venture is determined to be a VIE, a company must apply the same tests to determine if it is responsible for consolidating the joint venture discussed above. This is particularly relevant as most commercial real estate joint venture entities are structured as LLCs or LPs. Similarly, substantive participating rights allow these same members or partners to block or participate in significant financial and operating decisions. Substantive kick-out rights allow the nonmanaging members or limited partners to dissolve the partnership or remove the managing member or general partner without cause. Under ASC 810, LLCs and LPs are presumed to be VIEs unless a simple majority (or a lower threshold) of the nonmanaging members or limited partners that are unrelated to the general partner have either substantive kick-out rights or substantive participating rights over the managing member or general partner. Conversely, a design-build firm may have little or no financial investment in the engagement, but significant control over key project decisions. For example, an investor may have a large financial stake in a development venture, but no active role in making decisions about design, construction or leasing. That means a construction or real estate entity must determine the role it plays in the design, operation, investment or financial support of the project. If a joint venture is determined to be a VIE, the consolidating entity may change over the life of the project. These guarantees often don’t lapse upon project completion, since lenders and other interested parties aren’t inclined to lose additional security provided by a guarantee until the real estate project is stabilized and generating sufficient cash flow to fund its commitments. This may include debt, performance or financial return guarantees. While these VIE criteria can be met in a variety of ways, a common way is for one party to provide some form of guarantee on behalf the joint venture. As a group, the holders of the equity at risk lack the obligation to absorb a joint venture’s expected losses, or have the right to receive a joint venture’s expected residual returns.As a group, the holders of the equity at risk (generally members or partners) lack the power, through voting or other rights, to direct activities that most significantly affect a joint venture’s economic performance.The investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.A joint venture is generally considered a VIE if it meets one or more of the following conditions: The first step is to determine if the joint venture is a variable-interest entity. The guidance is divided into two consolidation paths: the variable-interest entity model and the voting-interest model. Joint venture requirementsĪSC 810 provides guidance and rules to help real estate professionals determine if consolidation of a joint venture is required. It is vital for real estate professionals to understand the accounting rules in order to determine what stakeholders need to review at major phases of a typical commercial real estate project. Yet real estate professionals continue to face confusion over the consolidation of real estate project entities and joint ventures.įor many years, the party with a majority ownership interest in a commercial real estate project owned through a joint venture was primarily responsible for consolidating the financial results of that joint venture or letting it stand as an off-balance-sheet entity.Ĭonsolidation rules under ASC 810, however, have become more complex over time, and builders, developers and other parties are required to closely evaluate not just majority ownership, but what entities are driving economic and financial performance at every project stage. These joint ventures are primarily structured as limited liability companies or limited partnerships. Since the Great Recession, a greater number of development projects have been structured as joint ventures, with parties sharing risk and reward.
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