What is joint venture property development?
According to the Oxford dictionary, a joint venture is “a commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct identities.” In property development this extends to an arrangement between two or more partners working together to achieve a clear set of objectives.
As property is a traditional investment asset that can provide high yield returns, there is always strong interest in the development market. Joint venture property development is attractive in instances where:
- A land owner is unsure how to unlock the potential of their asset
- A funder is unwilling to get involved in managing the works but is interested in a share of the profits post development
In either of these circumstances, a property developer should see the potential for a joint venture to be structured and find an agreement that entices the parties to work together for a common goal.
Commonly deployed within the property development industry, joint ventures can be successful if they are set up correctly and when all parties are clear on their obligations. They are principally set up to share the skills or assets of the parties involved, but also the risks in property development. These joint venture agreements can be used towards obtaining the finance to make the desired property development a reality.
How does it work?
There are many different ways to enter into a joint venture for property development, but what is important is that each party understands their role and responsibilities. Limitations and liabilities are detailed within the joint venture agreement as this will govern the administration and dictate how the parties will need to work together to achieve success.
The most common form of entering into a joint venture is through a limited company whereby the parties, be it investors, developers or landowners, become shareholders of the company. These types of joint venture are also known as a ‘special purpose vehicle’ or SPV.
Under such an agreement, the limited company can be set up for the development in question and the liability is proportioned to the share capital between the parties. Once the development is complete and has presumably increased in value, the shares grow in value and can be sold, which can offer flexibility for the developers. Such an arrangement also limits the party’s liabilities due to the limited status of the company.
Another way to progress the with the collaboration is to enter a Contract Development Agreement (CDA), which is when two or more parties enter into a contractual agreement for the sole purpose of carrying out a development. The ease of arrangement is the appeal here as they are straightforward to set up and, from a liability perspective, each party is responsible for their debts.
Under a CDA, each partner is taxed on their own profits and what is also appealing is that each partner retains control of their assets. However, this arrangement does not form a legal entity and investors may therefore consider the lack of any real assets to be too risky a proposition to invest.
An even more relaxed agreement is a simple partnership whereby two or more persons form together with the intent to enter into a trade agreement. The partnership can be drawn up between individuals, which is appealing as it does not legally constrain itself and each person is taxed individually as there is no limited company set up. However, as in the case of the CDA, it can be difficult to obtain investment as such an arrangement is not a legal entity and is also entirely reliant on the individuals who are partners. If a partner leaves the agreement, a new partnership agreement may be required, which could be time consuming and affect progress, notwithstanding the costs of drawing up a new agreement.
Considering the drawbacks of a simple partnership and a CDA alongside a limited company is where Limited Liability Partnership (LLP) can become attractive. An LLP incorporates a partnership but as they are a separate legal entity, they have the same benefit of a limited company. Each partner is taxed on their share of any profits and their liability is limited. As the LLP can own assets and make the partners legally liable, this set up is more appealing to potential investors.
In terms of finance and what is required for the joint venture development, this will depend on the type of work. The degree of complexity, value and timescale will dictate which sort of arrangement is appropriate to enter into. For example, if you are undertaking short-term refurbishment works where there are no major structural changes, a joint venture development agreement may include a short-term bridging loan that, once the works are complete and the property is sold, is paid back through the return on investment. Bridging loans are possible to cover the entire cost of development, but this is uncommon and they are more likely to be used for the difference between purchase and refurbishment.
For extensive renovation works where a building may be altered for a different use, the project timescale is usually a long one and a commercial mortgage could be better suited than a bridging loan. Operated in a similar way to those taken out for home ownership, commercial mortgages are a relatively straight forward financial arrangement. A simple partnership or CDA is unlikely to be enough to obtain such funds and therefore a limited company or LLP is more appropriate.
If you get to the point of business expansion where you are involved in major developments from the inception, options, preliminary and detailed design stages, construction, and operation, then finance will be needed over a long duration of time and may be for large sums of money. In this instance, complex legal arrangements between all the relevant parties is required where the joint venture property developer will need to give serious consideration to each party’s obligations before signing up to terms.
Who is it for?
There will always be a requirement for joint venture property development in situations where landowners, residing on viable and profitable sites, are identified and the site simply requires unlocking in terms of investment and development to realise profitability.
In situations like this, property developers can sell their skills to bring parties together in a structured joint venture arrangement.
Alternatively, an inexperienced developer may decide to team up with an experienced developer to learn the skills of making a joint venture property deal a success. Whilst this would mean effectively giving away an element of profit, what if the deal could be structured in a way that you invested in the smaller property developer’s limited company? Therefore, if they were to go on and be successful, you would profit from this success all for the price of upskilling their company and affording them similar opportunities.
What are the benefits of joint venture property development?
The benefits of teaming up with other parties are the mix of skills that each brings to the team to make it stronger.
If you are working with experienced joint venture partners, you are adding to the technical skills of the project’s development team, which can only aid success.
For example, it may be that your joint venture is with an architect and builder and that you are approaching investors for the majority capital to purchase and develop land. On this basis, the investor is putting forward most of the funding and they will likely require a bigger stake in any profits. However, if the joint venture works well together and uses their combined skill set towards mitigating risks and focusing on delivery, then access to capital can be obtained via this proven track record of success as the joint venture is generally seen as less of a risk to investors.
What are the drawbacks?
There are downsides to Joint Venture Property Development such as the limited company set up or even limited liability partnerships, both of which can represent an administrative burden where taxation comes into play with the company and for the individuals involved.
Even considering the limited company status, it’s not uncommon for the individuals concerned to be asked for a guarantee to secure the investment required.
In terms of partnerships, the general partner has unlimited liability for the whole venture, which can be a major risk for an individual to take on let alone the investors you approach.
Once the property is developed, talk of exit strategies comes into play, which means you will need to consider how to release the value of the asset. For a simple partnership, this is likely to be fairly straightforward as each party pays their share of taxes on any profits and moves onto the next project. However, for a limited company or LLP you may need to consider selling your share of the company, including all of the legal agreements required, to facilitate this.
Which companies offer joint venture property development in the UK?
There are many companies that offer joint venture property development. For example, The Santon Group are one of the largest private developers in the country with a turnover in excess of £600m and they have undertaken development of nearly £1billion. Having started in 1992, the company specialises in the planning and development of both residential and commercial property. In terms of joint venture, their expertise facilities the coming together of landowners and developers to obtain the funding required for property activities.
On a smaller scale, companies such as LendInvest offer an online platform for property finance and investment including agreed funding streams for programmes of development. Trading under their current name since 2012, it’s estimated that their total capital available for lending now amounts to approximately £1b. Despite high value of capital available, they support small to medium enterprises or SMEs with access to this funding by way of joint ventures to work in the residential property market.
From a different perspective, companies such as the Lindum Group have worked with joint venture development partners since 1995. Their skill is in the procurement, design and build of housing and mixed-use development schemes. As their projects range from £100k to £20m they could be of interest to those looking to start their own property development company.
If I want to approach a joint venture funder, what are they looking for? What do I need to qualify?
To attain any type of funding you need to demonstrate your GDV or Gross Development Value in order to prove that the investment is viable.
Your GDV needs to establish the percentage of investment compared to the final value of the property development. What is the ratio of the investment versus the final value of the property? For example, if the investment is £150k plus the Joint Ventures capital of £50k versus the projected value post development of £300k, the profit on GDV is 33.33%. As a norm the profit on GDV is typically between 30% and 40%.
An investor will consider their decision on the return they are likely to receive and this could be for one off profit on smaller project developments or potential rental yield or other income for larger scale developments.
To demonstrate your business case, you will need the forecast:
- Total build cost, which can come from a good cost plan
- Any allowances for general contingency
- The purchase cost of land required
- The cost of planning permissions and conforming to planning regulations
- The final value post development in order to create your estimated yield and GDV
Notwithstanding the GDV, the joint venture will need to demonstrate their background of success in the type of development for which they are seeking investment, which plays into the use of teaming up everyone’s skill sets.
Conclusion on Joint Ventures
The strategy and partner selection is paramount for a joint venture partnership to stand the test of time and the rigours of property development. If successful and with the right financial backing, the potential for rapid growth and expansion is huge.
However, there will be serious repercussions if the correct agreement is not set-up from the outset. Project selection is critical to ensure profitability and to attain financial backing.