Updated: Aug 11, 2018
Reasons to consider Joint Ventures:
Joint Ventures In Real Estate Development
A joint venture ( JV) is a legal entity formed between two or more parties to undertake economic activity together.
There are many reasons why you would consider joining with another person to undertake a development project in Joint Venture.
Usually the most basis reason revolves around something you don't have.
Some of them may be:
1. I own land ... have capital & capacity to borrow ... but no experience.
2. I have capital & capacity to borrow ... partner has land ... both have no experience.
3. I am 'time poor' ... work full time and can't be personally involved ...
4. My property will sell for more if developed than just as vacant land.....
Two or more entities / people team up to work together on a specific venture, pooling their resources, normally for a short term while remaining separate entities.
For example, two groups may form a joint venture to undertake a development project that neither can do on its own.
So when we talk about Joint Ventures in property development what we mean is organizing a relationship between two or more people (companies or trusts) where each person contributes to the completion of the deal.
Examples of possible assets that people can contribute are;
- Money (or equity e.g. the land etc.)
- Experience (previous deals/developments)
- Education (knowledge)
- Skills (i.e. Building).
These are just a few examples, and remember every deal is different.
Motives for setting up a JV
If you are interested into doing a property deal, but are not able to complete it on your own,
For example because you don’t have the development experience or building skill you need, you may then look for someone that has the experience, but does not have the finance or property needed to conduct the deal on their own either.
This would then allow you do conduct the deal using someone else’s skill and experience, however for this to be appealing for the other party, you may need to offer a percentage of the profit at the completion of the development.
The above example is very stock standard, however all JVs will follow this concept. So reasons for doing a JV would be to open up possibilities, and allow you to be a part of deals you normally wouldn’t be able to do on your own.
Another example of a possible JV could be if you are all set up to do a development; you have the land organized and financed, plans have been done, however you do not have the cash flow to fully pay for the building component.
An idea could be to offer the builder a JV, so rather than paying him the contract price, he supplies his skills at cost ( assisting cashflow ), and you give him an agreed upon percent of the profit.
The percentage he gets should not only cover his profit element but ensure he gets a share of the development as he has shared in the risk.
Benefits of doing Joint Ventures
- Building on your strengths.
- Improving access to development and Building experience.
- Combining your resources and assets with somebody else’s allows you both to take on a project neither of you would otherwise be able to.
- You will get to access new skills, knowledge and experience - saving you time and money or possibly the other way around.
- You will have access to greater resources, beyond your own.
- You will have the opportunity to build strong associations within the property industry.( Banks / financiers / Architects etc)
- There is no rule or limit as to what is allowed or not allowed as far as JVs go. A Joint Venture would see you both profit. While each person is contributing, each person will also get a share in the revenues, sometimes also expenses, and control of the property, whatever is agreed upon at the beginning of the deal.
Before entering into a Joint Venture
- Due diligence – checking the value of the site and its potential.
- Creating an exit strategy and terms of dissolution of the Joint Venture. ( on completion of the project)
- There are of course some things that you need to be aware of and some factors you must consider such as trusting and liking your JV partners. If something does not feel right then it probably isn’t.
A JV agreement defines the terms and conditions and records the interests of both parties. It will provide you with strong legal recourse should a misunderstanding arise and the other party fails to fulfil its obligation while under contract.
- When setting up a JV it is very important to specify very clearly what each person’s contribution is, and what each person will receive. This must be agreed upon, and put in writing before the deal is commenced.
Getting a Contract
Joint Ventures involve complex contractual arrangements that should be left to the lawyers, particularly if there is a lot at stake, to ensure that your interests are properly protected and any disputes can be resolved should they arise during the development.
Don’t rely on a handshake no matter how much you think you know a person. Even if the person you are looking to do a Joint Venture with is a family member, always put it in writing.
Our solicitor should be able to think outside the box and come up with the contract for the parties. It is worth paying a little more for a solicitor that’s going to be creative with you. Make sure they spend time dealing with property as this way they will be fully aware of what’s happening in the property market, changing laws and any loopholes that may exist.
The professional and qualified team at Bonnici & Associates can assist with a variety of different development projects. Bonnici & Associates have been involved with developments that are versatile, from design through to construction quality.
Examples of Joint Ventures
Alan has a property in Engadine, Sydney. It is a vacant lot, 8000m2, worth $500,000, that has been in the family for years. Alan would like to develop the land but has no idea what to do therefore he advertises it. He meets with a developer and they decide to do a joint venture.
The developer pays all the construction costs, consultant costs etc and sees the development through to the end, the funds are secured by the vacant lot.
They then split the profits at the end as agreed and signed on at the beginning of the profit.
Michael has a development site in Townsville but does not have the experience to Project manage it nor any building experience. He strikes up a JV where the developer / builder will construct at cost only and take profit at the end either in remuneration or stock in the project or a combination of both.
He acquires the development and building experience of his JV partner and increases his cashflow thus reducing the project risk.
Hazel has a property with an older style house which is constantly in need of repair and maintenance.
Hazel is advanced in her years and finds this increasingly difficult by the year. She loves the area and her friends so she would like to be close.
She approaches a developer for a JV such that she only puts up her land and the developer will demolish the old house and build in its place a duplex to Hazel’s design, finishes, colours and taste. On completion Hazel will take one of the Villas / Townhouses and the other is taken by the Developer to cover the cost of the development and allow some profit.
Hazel now has a property that is virtually maintenance free and is increasing in value ( capital gain) instead of the previous older house that was being eroded to just land value. Generally this type of JV sees the new villa on completion, more valuable than the older house on the larger block.
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