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Joint ventures – how to avoid misunderstandings and maximise the upside.

Updated: Nov 15, 2019

Partnering, collaborating, joint venturing are terms often used to describe working together on a project so let’s start with an explanation as to what I mean by a 'joint venture' within property development.


A joint venture (JV) occurs when two or more businesses join together to pursue a specific project. For example, BMW and Toyota are co-operating on research into hydrogen fuel cells, Google and NASA have a joint venture to develop Google Earth. In property development we often see the volume housebuilders collaborating on very large sites each taking sections of land and sharing some infrastructure costs.


The businesses remain separate in legal terms and have a written agreement detailing the purpose, how the two (or more) parties share in profits and losses, how the parties make decisions and who is responsible for what. When individuals join forces to pursue a project it is a partnership and whilst the written agreement is similar in purpose each partner is personally liable for the debt and obligations of the partnership.


Most JVs that we see end in disagreement, disappointment and considerable emotional and financial cost. The biggest reasons for this are:-


Lack of real development experience:

Having relevant industry experience e.g. Project Manager, Architect, Contractor can be extremely valuable however until someone has risked their own money/livelihood they don’t understand what being a property developer is. Trading through at least one economic cycle is essential to fully understand the markets.


Not enough due diligence on the project:

Full development appraisal covering all project stages incl acquisition, planning, all costs, funding, build and exits are required to fully understand the risk and reward balance.


Not enough due diligence on the partners:

Getting to know potential partners in business and social situations. Talking about finances, past and present, and personal things like relationships and health is really important as the consequences can be huge. Gut feeling is important.


Unrealistic expectation, primarily due to all of the above.


Why we joint venture:

  • Involvement in exciting projects that contribute to communities.

  • Access to land opportunities.

  • Mitigate and spread risk.

  • Access to greater financial resources.

  • Utilise different skill sets, maximising experience and knowledge.

  • Key factors we consider:

  • Project viability and exit strategies

  • Choosing the right investor/partner

  • Legal agreements

  • Liabilities

  • Taxation


Structure

There are different types of joint ventures and how they are structured depends on what we are trying to achieve. If the project is to be completed and sold the structure could be different to that if some or all of the completed units are to be held.


New limited company:

This is when you set up a separate joint venture business, to complete a specific project. This can be a very flexible option. The partners each own shares in the company and agree how they should manage it. Different classes of shares can be used to separate legal and financial responsibilities. A JV/partnership agreement should be used to clarify roles, responsibilities and obligations.


Business partnerships:

In some cases, possibly if the completed units are to be kept long term a limited company may not be the right choice. Instead a business partnership or a limited liability partnership could be formed.


Limited collaboration:

This is when you agree to collaborate with another business in a limited and specific way. For example, a landowner may wish to JV in the development of their land with a building contractor. The two partners agree a contract setting out the terms and conditions of how this would work in a JV/partnership agreement.


Whichever business structure is used a JV/partnership agreement is essential and the key areas to agree prior to extensive and often expensive discussions with lawyers and accountants are:


Agreeing the purpose:

Often seemingly clear, for example, obtain planning, construct houses and sell them on completion. Useful to consider timelines at this point, how long are the parties expecting/hoping to be involved in the project?


Financial risk:

Percentage shares are often subject to negotiation, whilst during initial discussions equal splits e.g. 50/50 or 25/25/25/25 are agreed these %s may change during the paperwork as the degrees of risk and the possibility of personal guarantees and debentures over other assets are discovered. Do any of the JV parties have other commitments that could affect the project, particularly financial? E.g. if a party is bringing money, when will that be available, is it being raised from others?


How the profits and losses are to be shared:

Who will be getting what and when? It could be that both profits and losses will be shared as per the agreed % split. What if one of the JV partners is a contractor who agrees to deliver the project for ‘x’ and then the costs increase? In this situation any cost overruns could be deducted from their share of any profit. What if one party is unable to deliver on their commitment, e.g. a project manager who doesn’t have the real experience, is out of their depth and a third-party PM has to be employed? The increased cost could come out of that persons share.


Deciding when the project profit/loss is crystallised is something that needs consideration. E.g. When all units are sold, and all the costs paid seems logical until you consider that there will be a defects liability period and whilst in theory any defects may be passed on to contractors/subcontractors the reality is that not always possible so money needs setting aside to cover this.


Taxation including VAT and the potential dissolving of the SPV need to be considered.

What happens if there is a loss, who will take liability? Are all JV partners in a position to fund a loss? Should any losses be ring-fenced with varying maximum liabilities for each party?


Decision making process:

What decisions will need to be made, by whom and what happens if there is a difference of opinion? Ultimately difficult decisions will need to be made at some point, possibly about costs and changing contractors/suppliers. In these uncertain times what will happen if the houses aren’t able to be sold within a reasonable time and for a particular price? Who will decide prices and changes (up or down) or take the decision to hold?


Responsibilities of each party:

What is each party bringing to the project? Talking through the potential project from ‘now’ until exit, effectively making an extensive ‘to-do’ list eg engaging architects, contractors and agents, is a useful thing to do collectively. All parties need to be 100% clear.


What-if something doesn’t go to plan and/or someone gets ill, dies or has significant changes to personal relationships?


All these areas are important to talk through with all potential JV partners paying particular attention to the expectations of each party. Obviously, there are a lot of ‘ifs and buts’ to consider and the above list is not exhaustive however, it is the ‘ifs and buts’ that will cause issues during legals or even worse during the project. The discussions will provide the basis of the JV/partnership agreement, effectively a memorandum of understanding or heads of terms. This represents a commitment to the deal and agreement in principle on the main points. You may wish to or need to sign a confidentiality or a non-disclosure agreement prior to the JV agreement drawn up and signed by all parties.


It is most important than any persons considering a JV take legal and tax advice from appropriately experienced others. Consideration should also be given to appropriate structures for funding. Advice from brokers and/or direct from funders is key. It is possible that you will receive contradictory advice as to the best structure to use, we always suggest that potential funding is considered first, then the tax and legal issues.

Typically, within property development the three main components of land, money & skills is where we see parties looking to JV.


Land – without land we don’t have a project so in many ways this is the most important part of a JV. A JV with landowners can be done however it can be really complicated and these ‘deals’ often fail in legals and funding. We look to purchase the land; the land owner can then invest in the project with a preference return and/or options to purchase units.


Skills – individual skills e.g. planning consultant, architect, project manager (PM), etc are essential in any project however they only form a relatively small part of any project. The key to any project is delivery so a PM has a greater value from a JV perspective than a planning consultant. In reality its best to buy in most of the skills rather than JV. Its still possible to incentivise skills based on results however unless they bring something else to the project e.g. land, money then a JV is not often a good idea. A JV with a contractor is worth looking at, in our experience contractors often have access to funds too. We need a contractor to deliver the project and with the added incentive of a profit share the project will more likely finish on time and budget. We work with contact sums and the contractor taking any cost overruns form their share of the profits.


Money – there are funding/development finance opportunities that will provide up to 100% of costs with some of these being JVs however its very important to understand the Ts&Cs as there can be unshared ‘penalties’ for cost and time overruns. The funders step in rights need to looked at very carefully too, the project could be taken from you even whilst its still doing ok.


Development finance will mostly require an element of equity input, often known as ‘skin in the game’. Equity providers are where many developers look to JV. What needs to be understood is that generally development finance will also be required for the project and the responsibility for this is often shared across all the JV partners.


Personal Guarantees and possible debentures on company assets are often required. As an equity investor or borrower, it needs to be clear as to who is prepared to take the responsibility/liability for the whole borrowings. If an investor is putting in all the equity and doesn’t want to give PGs its important to know this upfront as it will affect the project structure (possible new SPV) and needs to be reflected in the JV agreement.


Our preference for most projects is to buy in the land and the money and JV with the contractor who will deliver the project. We also partner with other developers taking an equity stake in projects across the country and sometimes share our equity stake with investors.


Working with others enables us to spread our investment risk and being a part of something can be much more rewarding and less stressful than working on your own.


Do not consider a JV if you need full control, it won’t work for you or the partner/s.

© 2018 Your Land Partner Ltd.