Building a new facility can be a daunting and risky task. It’s often too much for one party to handle alone. In response, manufacturers, suppliers, and developers are increasingly using joint venture (JV) agreements to bring new construction projects to life. This shift towards collaborative financing helps spread the risk and boost the chances of success, especially in capital-intensive fields like cold storage and advanced manufacturing.
From Speculative Development to Joint Ventures
Speculative (spec) development is common in real estate, especially around big-box logistics facilities. With the scope of today’s industrial projects, spec development can be risky. So many of the industrial deals being completed today are in the Advanced Manufacturing sector where it is hard to know what to build for. Many of the Advanced Manufacturing projects today have unique facility characteristics such as height, column spacing, slab thickness or office space. In addition, with construction costs escalating and the additional construction requirements to accommodate automation, the cost to construct a building has a hefty price tag and could present a significant impact to a developers P&L. These risks have made the old spec model less viable, leading to a rise in JV partnerships. especially in sectors needing hefty upfront investments.
Financial Structure of Joint Venture Partnerships
Joint venture agreements offer a strategic and financially sound approach.
At the core of JV partnerships is cost-sharing. This approach allows developers and end users to pool resources and share risks. Developers don’t have to bear the entire financial burden of building a facility, while end users, who might be investing hundreds of millions, can mitigate their risks while securing the infrastructure they need.
Manufacturer-Supplier JV Partnerships
A notable trend within JV partnerships is the partnership between manufacturers and suppliers. These partnerships offer significant benefits, like reduced outbound transportation costs for suppliers by co-locating with their primary client. However, this can also limit the supplier’s ability to serve multiple clients. For instance, one JV partnership enabled a manufacturer to defer building a new facility while a supplier used an existing asset that was underutilized, highlighting the flexibility and mutual benefits of such partnerships.
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Impact of Federal and Local Incentives
Federal funding is crucial for supporting JV agreements, especially in industries like electric vehicle (EV) manufacturing. Companies often seek state and local incentives alongside federal funds to maximize support. However, navigating these incentives can be tricky, as states have varying rules. Companies must creatively phase their projects or negotiate terms to align with both federal and state criteria.
Local Government’s Role in Supporting JVs
Local governments can significantly boost the success of JV partnership by acting as third partners. They can support projects through funding construction, offering property tax abatements, and programs like Tax Increment Financing (TIF), which provide upfront cash for pre-vertical activities. Some communities have even funded building construction and leased them back to companies, supporting local economic development and maintaining valuable community assets.
Capital Markets and Commercial Banks in JVs
Pooling resources can speed up project timelines and start production sooner.
Capital Markets Groups are vital in facilitating JV partnerships, connecting companies with investors willing to finance new projects. This funding is often more flexible than traditional bank financing, which demands stringent commitments. For startups and smaller suppliers, traditional bank funding is challenging, but programs like new market tax credits can provide crucial support, enabling participation in JV partnerships.
Long-term Viability and Success of JV Projects
The benefits of JV partnerships are substantial. Sharing financial risks and pooling resources can speed up project timelines, start production sooner, and generate revenue quickly. These agreements also allow for phased expansions, letting companies scale operations as demand grows. For example, a manufacturing facility might initially occupy a smaller shared space, delaying the need for a larger investment until the business stabilizes financially. This approach mitigates risk and positions companies for sustained growth.
Joint venture agreements offer a strategic and financially sound approach to new construction projects in the manufacturing and supply sectors. By fostering collaboration between developers, manufacturers, and suppliers, these partnerships spread risk, enhance project viability, and support long-term growth. As the industrial landscape evolves, JV partnerships present a compelling model for sustainable and successful development.
