Here is an insight and in-depth knowledge on our series on Joint Venture development (Part 1)
Real estate investment and real estate development convey significant investment yields from development of a site to actual sales or leasing of the final development. However there are parallel risks that can arise such as increase in costs of constructions, rival claims to land, dispute with government authorities amongst others hence the need to reduce or spread the risks by partnering with 1 or 2 parties.
What is a Joint Venture commonly know as “JV”?
A joint venture is a business arrangement whereby two or more parties combine resources and capabilities to accomplish a specific task or business goal though they in some cases, retaining their distinct identities. An example of such parties is a real estate developer with the capacity to identify develop and deliver a real estate development oppourtunity, a land owner who contributes his land to the venture and a financier who funds the development venture.
Joint Ventures are similar to partnerships where all the parties share ownership and control as well as risks and returns of the business. Joint Ventures are however for a limited period and for a specific purpose with the parties wither retaining their individual identities or merging their interests under a vehicle known as a special purpose vehicle, “SPV”
Who are the Players in a Real Estate Joint Venture?
As mentioned above, most real estate joint ventures are comprised of two separate parties: the operating member and the capital member. The operating member is usually an expert on real estate projects and is responsible for the daily operations and management of the real estate project. A typical operating member is usually a highly experienced professional from the real estate industry with the ability to source, acquire, manage, and develop a real estate project. The capital member usually finances a large part of the project or even the entire project.
In a Real Estate Joint Venture, each member is liable for profits and losses relating to the joint venture. However, this liability only extends as far as the particular project that the joint venture was created for. Aside from this, the joint venture is separate from the members’ other business interests.
Why Enter into a Joint Venture in Development?
There are many forms of joint ventures (i.e public-private partnership; private-private partnership; financial institution and private partnerships etc) and many reasons for entering into a joint venture, however, within the real estate development industry we can narrow down the reasons to three core areas, which are Land, Finance and Skills.
These three areas are usually the driving force between either seeking a joint venture partner or requiring to enter into a joint venture.
The rationale behind the joint venture is that every person or business entity has greater strength, resource and comparative advantage to deliver on a key component required for the effective delivery of the development.
The Importance of a Joint Venture Agreement:
Once you have agreed in principle to partner up with someone and form a joint venture, the actual JV agreement becomes a critical document and one which you should spend some time on getting right. All parties need to be 100% clear on their roles, responsibilities and rights within the joint venture.
A formal contract is important to the smooth running of a joint venture. It ensures that there is clarity on the limited purpose of the joint venture and on the parties rights and duties.
This is an area which you must seek legal advice on. A badly drafted JV agreement can open up many risks to you as the developer/ investor and create a poor platform for a joint venture to be formed.
Structure of a Real Estate Joint Venture
In most cases, the operating member and the capital member of the real estate joint venture set up the Real Estate project as an independent Limited Liability Company (LLC). The parties sign the joint venture agreement, which details the conditions of the joint venture. such as its objective, the contribution of the capital member, how profits will be split, delegation of management responsibilities for the project, ownership rights of the project, etc.
However, a real estate joint venture is not limited to an LLC. Corporations, partnerships, and several other business arrangements can all be used to set up a joint venture. The exact structure of the JV determines the relationship between the operator and the capital provider.