What is a cash call in joint venture
Cash calls are requests sent by joint venture operators to non-operating partners for payment in the light of anticipated future capital, operating expenditures or need of additional capital contributions. In other words, before expending funds on a project already contracted for or pay invoices due, the operating partner will issue a cash call to the non-operating partner to advance the costs.
Because it is not practical for all the participants in a joint venture to manage the operations, the partners designate an operator
The operator of a joint venture is charged with managing and conducting the operations on behalf of all the participants. Depending on the joint venture, the operator may be one of the participants, a subsidiary of a participant or a corporation formed to act as an operator in which each participant holds a share in proportion to their interest in the project. Typically, the operator is an expert on the type of project and is responsible for the daily operations and management of it. An operating member is usually a highly experienced professional from the industry with the ability to source, acquire, manage, and develop the project.
The operating partner of the joint venture issues a cash call in the joint venture agreement to the non-operating partner, usually under the provision they have included in their agreement. It is common that such provision for a cash call is inserted in the agreement signed by the partners, spelling out the terms, the proportion of the contributions, and payment of the terms.
Cash calls are often issued by the operator and paid by their partner several months before the expenditure is incurred. For the cash calls to work better, most joint venture agreements are using an accounting system called SAP JVA, system that has two main functions – to create an accounting record of all the cash call payment and register the month in which they have been paid and to apply all of the payments in the month when the expenditure is incurred. This is called the reclassification process.
To illustrate what is a cash call in a joint venture, Partner A and Operator decide to construct a building and the starting date is August. Partner A has 40% interest in the project and the Operator has 60% interest. Three months before the project starts, the Operator issues a cash call to Partner A for the month of May (month in which the bill will be issued too) for Partner’s A proportion of the expenses that are anticipated to be incurred in August. So, the Partner will pay the cash call in May – the billing month, and August will be the month of the actual expense. In August, when the project is completed and the expense is actually incurred, the cash call payment will be applied towards the actual expense that was occurred in August.
The cash call in the joint agreement provision should be as detailed as possible, in order to prevent possible problems or disagreements arising out of it
For instance, the agreement can help the partners’ understanding towards the scale of the future capital or investments they would have to make by giving concrete examples with both the circumstance and the amount that would be needed in such circumstance. Also, it is indicated that parties would include in their agreement a minimum and a maximum amount that could be asked in such circumstance. Further, the agreement should be mentioning the risk of the cash calls, also by giving examples. The parties should also consider in their agreement the billing and the payment processes and deadlines, state the penalties for tardiness in payments and the sanctions for non-payment.
Before proceeding with a joint venture agreement, contact us, your international business lawyer in Florida, to discuss what cash call in your joint venture agreement best fits your needs.