In very simple terms, a joint venture in property development is an arrangement between two or more partners to co-operate together in order to achieve a common set of goals, outcomes or objectives. It is a structure that is commonly used within the property development industry and when used effectively, can provide significant value for all the parties involved.
By successfully using joint ventures in property development we can share and spread risks with other parties, unlock sites, access finance and use specialist skills. A very powerful structure, provided we know what we are doing.
Like a lot of concepts and structures in property, using joint ventures in property development can be daunting at first until it is fully understood and utilised. This article has been put together to run through the basics of what a joint venture in property development is, when to use them and an overview of how they can be structured. As you’ll see after reading the article, your business plan may want to include joint ventures as a strategy.
This article is part 1 where I’ll go through the following:
- Why enter in a joint venture in Property Development..?
- The importance of a joint venture agreement
In part 2, I will take you through the common ways of structuring a joint venture in property development.
Let’s get into the detail and get you up to speed with joint venture in property development.
Why Enter into a Joint Venture in Property Development..?
There are many forms of joint ventures and many reasons for entering into a joint venture, however, within the development game 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.
So lets take a closer look:
Reason 1 – Land:
As we know in property development, land is a premium and finding land is what most of us spend a lot of time doing. A property development deal can take many forms and can be structured in many ways, however, there are times when accessing and securing land can only be completed by entering into a joint venture.
Therefore, by entering into a joint venture, we are unlocking land opportunities.
I provide an example…
In my previous life as a corporate property developer we purchased a 4 acre site within a huge regeneration area of London. Having control of that piece of Land, we approach the Homes and Communities Agency (HCA) who were the land owners of a huge 110 acre site neighboring our land with the intention to secure their land for us to develop.
The concept was fine, and the HCA were keen to have a commercial developer regenerate their land as its not something they would do themselves, however, they thought that our company was too small to take on a 110+ acre regeneration site all by ourselves, which was a fair point.
The HCA advised that if we can find a JV partner with a big balance sheet, then they would allow us to take control of the entire site.
So we did… we found an international developer with deep pockets and teamed up with them to form a new joint venture company, which then allowed us to turn a 4 acre site into a 15+ year 110 acre development project.
So that example is quite extreme, but you get the idea. By teaming up with other parties you will be providing a stronger team to potentially take on more complex sites, bigger sites or opportunities which may not have been previously available.
Reason 2 – Finance:
A second, and probably much more obvious reason for entering into a joint venture in property development is to secure funding.
Property development is a very cash hungry industry and requires most funding to be provided up-front before any revenue can be generated. Even small development sites need hundreds of thousands of pounds invested, so it is natural to seek solid sources of finance by bringing in other parties with money.
Entering into a JV to secure finance is a great strategy for completing property developments and working in the industry when you or your company does not have much finance or equity. Bringing in a JV partner who has a strong track record may also help you and the JV raise development finance for a situation where you and your company would struggle to get funding. For a new developer, this is exactly the correct reason for seeking a JV partner.
There will also be plenty of opportunities to enter into JV’s with investors who have money but want to remain silent or passive in a project. The investor, in this case, would rather take a share of the profits than receiving interest on the money invested, and it provides a great resource for us developers to explore as funding options for our sites.
So think about this…
Your next development appraisal and project may benefit from bringing in a JV partner to ensure that the project can be fully funded and many projects have had great sucess doing this.
But also remember this…
By bringing in a JV partner will also mean you lose some control and you share out your profits. In some cases you may not have a choice, but sometimes, having control is a great asset.
Reason 3 – Skills:
Like all professional industries, property development requires a huge set of skills. It takes time and effort to master property development and the success of most projects comes down to the skill of the developer.
Property is a large and traditional investment asset class which provides lots of lucrative opportunities for investment both from within and outside of the industry. There are also vast numbers of landowners who are sitting on future viable and profitable development sites that they cannot unlock or take forward.
So there will always be both a requirement and value attached to property development skill, the skills and ability to take on a project and complete it.
You will, therefore, see many opportunities to create joint ventures in property development where there is a requirement for skills. Investors or landowners who do not have the skills but have something to bring to the table… which happens to be both areas already discussed above… Land and Finance.
Landowners obviously have land and investors, of course, have money. This provides for an excellent opportunity to create joint ventures and the mix of skills, land and finance can create successful partnerships. Us property developers should always be alert to these kind of opportunities where we can sell our skills as ‘equity’ within a well structured deal.
However… there is more…
As a new or inexperienced developer, skills are what you lack. Generally within development you can learn the core concepts through education but to be a truly skillful and profitable developer, you need to gain experience.
So this provides an excellent opportunity for new developers to JV with experienced developer to learn how to do it and how to be successful. Of course, you will be giving away some profit and control to do this, but in the long run, its a great tactic and strategy.
To conclude… land and money obviously have a quantifiable value, but don’t forget that skill and experience can also offer great value in the right circumstance.
Your Reasons Summary:
So there you have it…
The 3 main reasons for entering into a joint venture in property development. Fairly straight forward once you understand the driving force for joint ventures.
To finish this section, you should try to think about what would make a successful joint venture? Using the 3 reasons above, to me, its very clear that successful joint ventures work when all the parties are bringing something different to the table. If one party is bringing money and the other skills, then that has the basis to create a great JV. However, on the flip side, if both parties are bringing skills… then you would question the reasons for the JV and can create bad structure.
Let’s move on…
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.
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 and create a poor platform for a joint venture to be formed.
The JV agreement essentially sets out the terms of which will govern the joint venture and how the parties will interact between each other.
The agreement will be specific to your situation and circumstances, so it is impossible to create a ‘one size fits all’ type of document, however there are some key principles worth considering, such as the roles of all the parties, who will manage the development, what are the profit share arrangements and what restrictions are there in place.
When it comes to the JV agreement, the best way forward is to draft some loose head of terms with all the parties involved to cover the basics of the JV. This should then always be drafted and put in place by a solicitor with the correct experience where the real fine details can be flushed out and agreed upon.
As you have seen from this article, joint ventures in property development can provide excellent opportunities for us developers and others outside of the industry.
Land can be unlocked, finances secured and skills provided within a joint venture setup.
Joint ventures, when correctly structured and with the correct intentions can be hugely successful and it is something most developers will come across in their careers.
Think about how a JV can affect your property business and whether its something you should be considering more actively.
I trust this has been useful and join me for part 2 where I’ll go through the common ways to structure a JV.
All the best,