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During a credit squeeze, joint ventures can be a viable means of bringing new capital investments to fruition, provided the site-selection process is well managed.
Q With the constrained financial markets, our project is stalled because of an inability to complete financing, and we are considering a joint venture partner. How do partnerships or joint ventures work with regard to site selection?
The Expert Says: An emerging trend over the past several months has been an increase in joint venture ownership driving site selection location projects. It is clear that the financial market turmoil of the past eight months disrupted the financing plans of many companies considering new facilities. Both debt and equity markets were unstable or just unavailable. As a result, many firms are finding partners to meet the capital needs of projects. With the overall recession adding to the uncertainty in the market, such ventures also help mitigate the risk of projects, making them more palatable to cautious boards.
Fundamentally, the ownership behind the project should not impact the decision to take a sound rational approach to site selection. However, each step of the process may be more complicated due to the presence of two entities each with their own perspective on the decisions to be made during the siting process.
Project decision criteria development should proceed relatively smoothly. The partners likely have a strong alignment on the project and how it will operate, and as a result typically have a strong mutual understanding of key criteria. However, there will almost certainly be differences of opinion, especially with regard to the relative weights applied to factors. Proper alignment and consensus building techniques can move the project successfully past these challenges. It is helpful to note that such “conflicts” are common to most projects regardless of their capital backing.
Field evaluations will raise new differences among the project team, particularly with regard to softer factors such as quality of life evaluation or leadership assessment. It would not be uncommon for team members from the different investing companies to be meeting for the first time on the field trips. It is important that differences of opinion and perspective among the team members not be expressed in public to the point that the community hosts begin to question the viability of the project. Again, a strong location decision framework will allow such differences to enrich the decision process without letting the project be drawn off track by partner differences.
One area that will be important to account for if you proceed with a joint venture or partnership approach is community support and incentives. You need to answer these questions: “What is the entity that will own the project?” Is it a new entity that is the joint venture? Will one of the partners have ownership of the project? Will there be different ownership profiles for different parts of the project?
Second, development incentives, including grants and tax incentives, are typically tied to the entity that owns the property and/or employs the workers. How are incentives expected to be treated by the project? Will they stay with the joint venture, or will they be passed on to one of the partners? For income tax based incentives, will the venture be profitable, and thus have tax obligations, that will allow it to capture these incentives?
Partnerships and joint ventures are viable means of approaching new capital investment projects. A well managed site selection program, following a proven process, is more important than ever and will allow the project team to successfully address the unique location decision impacts of a joint venture structure.