When Joint Venture Financing Fails: Mortgage Structures, Value Protection and Partner Alignment

Reprinted from The Abstract, Spring 2026, with permission from the American College of Mortgage Attorneys.

For investors, developers and lenders alike, understanding the key considerations and potential pitfalls of joint venture financings is essential to protecting the interests of each stakeholder and managing complex situations effectively.

Separate Mortgage Rights

Separate mortgage rights permit a joint venture participant to mortgage its separate, undivided interest in a project in favour of a third-party lender as security for a loan, even where the other joint venture participant(s) choose not to do so. This is often done for the purpose of cashing out some of the participant’s equity in the property, to finance improvements to the project or to invest for other purposes.

For example, consider a co-ownership arrangement between a pension fund (or any other investor) and a developer regarding a retail shopping centre to be redeveloped. Assume that, in this scenario, the pension fund does not require or desire financing, while the developer does. Separate mortgage financing by the developer can give rise to a host of issues for the pension fund, the developer and the developer’s separate mortgage lender, all of which must be considered.

In such a situation, the pension fund will want to ensure that there is a cap on the principal amount and interest rate for the developer’s loan, and that other terms are specified in the loan arrangement with the developer’s lender to protect the fund. The fund will also want to know precisely who is holding the mortgage security and will typically require that the mortgage not be assigned or syndicated. For example, the fund may not want the mortgage security assigned to someone that is a competitor to the pension fund, a disreputable lender, or a party that the pension fund would not want to do business with or potentially enter into a joint venture, which could arise in circumstances where the developer defaults under its separate mortgage loan and its lender steps into the developer’s shoes as the fund’s new co-owner on the project. If there is a default under the separate mortgage loan by the developer, the fund will want the right to receive written notice and an opportunity to cure such default to the extent curable, or other step in rights in the event of a bankruptcy event or other incurable default by the developer. The fund will further want to ensure that, if the lender enforces its security against the developer, that the lender will be bound by any right of first refusal, liquidity rights, restrictions on transfer, and all of the other provisions contained in the joint venture agreement, and that any subsequent party to whom the lender may transfer the developer’s interest, when realizing on its security, is similarly bound. It is critical for both co-owners that, if they later wish to finance the property collectively (i.e., through a loan secured by a 100% interest in the property rather than separate mortgages), the developer’s separate mortgage lender be required to subordinate its loan in favour of the collective property financing.

Securing separate mortgage rights is particularly important where the co-owners have differing financial profiles or funding needs. Typically, one owner may want to leverage the property with institutional debt, while the other is either disinclined to do so or has alternative sources of financing. Establishing separate mortgage rights allows each co-owner to borrow independently, while protecting each party’s equity and interests in the project. It is essential, however, to carefully structure these rights based on the specific needs of the owners and the unique characteristics of the project.

Shortfalls in Value or Sale Proceeds

One significant challenge many joint ventures have faced in the current economic environment, particularly in the development space, is the risk of a post-completion shortfall in value, whether measured against total development costs or anticipated sales proceeds.

As demonstrated in the example above, perhaps after the joint venture partners complete an extensive redevelopment of the retail shopping centre, its market value is less than the costs expended to complete it or less than the amount of an existing loan secured against the property. Such scenarios are particularly sensitive, as they may trigger or expose covenants, guarantees or other credit support obligations provided by each joint venture partner or their respective affiliate(s). These risks should remain at the forefront when drafting joint venture agreements and should be carefully considered when negotiating relevant financing documents. It is essential to clearly allocate responsibility for any value or financing shortfall, as an imprecise or uneven allocation may disproportionately jeopardize the financial stability of one party relative to the other(s).

An additional scenario to consider is one in which an institutional investor is entering into a joint venture involving a higher-risk or speculative project. This risk may be compounded with the common situation in which a development partner holds only a small minority equity interest in the property and primarily stands to earn significant management fees on the project. This situation can quickly arise in a stressed real estate market or when economic conditions abruptly change. One solution to mitigate this risk could be to allocate any first losses or shortfalls to the developer and its equity interest in the project. In other words, if the project suffers a loss, that loss is first recovered from the developer’s ownership interest in the property. A parent guarantee from the developer could also help alleviate some of this risk, although developers are often reluctant to provide them.

The financing provisions outlined in joint venture agreements can often seem straightforward, but they don’t always work as expected in practice. For example, in cases where one partner is a well-capitalized investor, and the other has less capital available, the partner with greater financial resources may be reluctant to leverage institutional debt, preferring to use their own resources or retain unencumbered equity. This can create tension if the partner with limited financial resources needs funding from an institutional lender to support their share of the investment. In situations like these, it is essential to address the funding imbalance in the initial documentation. One might consider options such as staged capital contributions, in which the partner with greater financial resources provides upfront capital, and the partner with limited financial resources can contribute additional capital at a later stage. Alternatively, a cross-collateralization agreement could allow both parties to share in debt repayment responsibilities in proportion to their investments. Additionally, clauses that outline dispute-resolution mechanisms in these scenarios can be helpful, as financing disagreements may arise and disrupt the efficient operation or development of a project. These risks may be further compounded if such disputes become known to the market through a public process such as litigation, potentially affecting the project’s value or market perception.

Financing Provisions in JV Agreements Are Not “One Size Fits All”

Another financing issue to be aware of is how guarantees are handled within joint ventures. Lenders often seek additional collateral and guarantees to support project financing, and they may require one or both parties to backstop the financing with additional credit support. Even if the joint venture has sufficient collateral, individual partners may be required to offer additional corporate or personal guarantees. This is particularly relevant where non-recourse financing is unavailable, or the project being financed is more speculative or risky in nature.

This can create an imbalance if one partner is significantly more at risk than the other. Compounding the issue is that, in many cases, lenders will insist that partner or guarantor liabilities be joint and several obligations, meaning either of the partners or guarantors could be pursued for 100% of the debt or any shortfall. This has the potential to disproportionately expose the partner with greater financial resources if it is faced with a demand from the lender for an amount that exceeds its proportionate interest in the secured property.

Joint venture partners need to discuss up front who will bear these obligations, as certain joint venture investors either refuse or, for regulatory and/or tax purposes, are incapable of providing parent guarantees for their joint venture entities, particularly where one partner or its guarantor may be directly or indirectly guaranteeing the obligations of the unrelated partner or co-owner.

Lastly, it’s essential to remember that financing considerations should be addressed throughout the lifecycle of the joint venture. While initial capital contributions and funding responsibilities are typically negotiated and agreed upon at the outset, additional capital requirements or refinancing needs may arise as a project progresses and eventually stabilizes. Regularly revisiting the financing structure and adjusting for evolving needs or risks can help ensure continued alignment between the partners and avoid surprises later on. Recent experience has underscored this point, particularly as rising interest rates, construction costs and lingering office vacancy following the COVID-19 pandemic have significantly impacted projects where such joint venture arrangements were negotiated in very different market conditions.

Conclusion

Establishing separate mortgage rights, clearly addressing shortfalls, carefully structuring guarantees and planning for potential imbalances in capital contributions are all critical to a successful and smooth-running joint venture agreement. Having these provisions documented clearly and fairly can be the difference between a smooth exit and a contentious one, protecting each partner’s financial interests and creating a more resilient partnership overall.

For more information, please contact Daniel Kofman or any member of our Commercial Real Estate group.