What is a Real Estate Joint Venture (JV)
Simply, cash rich and land rich… let us make a deal…
As Kenyans seek ways of owning property, joint venture agreements are becoming increasingly popular. Joint ventures are agreements between land owners and investors that aim at developing real estate property. In simple terms.
A real estate joint venture (JV) is usually a deal between multiple parties to work together and compile resources to develop a real estate project. Most large projects are financed and developed as a result of real estate joint ventures. JVs allow real estate developers (individuals with land and looking to develop it) to work with real estate capital providers (entities that can supply capital for a real estate project).
The basic principle surrounding a Real Estate Joint Venture can be illustrated through the following example. Company X owns a plot of land in Nairobi- Lavington. However, Company X doesn’t have capital to develop that piece of land. Company Y does not have land in Nairobi- Lavington and it wants to put up a real estate development at that location. Plus Company Y has has enough money in the bank to construct the project. Company X wants to develop the land and build an office block there. Company X gets into a Joint Venture with Company Y, where Company X gives the land and Company Y provides Capital and the expertise for the development.
The Different Players in a Real Estate Joint Venture
As mentioned above, most real estate joint ventures are comprised of two separate parties: the land rich and the cash rich member. The cash rich member usually provides expertise on real estate projects and is responsible for the daily operations and management of the real estate project. A typical cash rich 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. And they usually finance 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.
Structure of a Real Estate Joint Venture
The members 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 parties involved.
Key Aspects of a Real Estate JV Agreement
A real estate JV agreement involves the following factors:
- Distribution of profits:
An important distinction to make when drafting the terms for a joint venture is how the members will distribute profits generated from the projects. Compensation may not necessarily be equally distributed. For example, more active members, or members that have invested more into the project may be compensated better than passive members.
- Capital contribution
The JV agreement needs to specify the exact amount of capital contribution expected from each member. In addition, it must also specify when this capital is due. For example, a capital owner may agree to contribute 75% or even 100%.
- Management and control
The JV agreement is expected to specify in detail the exact structure of the JV and the responsibilities of both parties regarding the management of the Real Estate JV project.
- Exit mechanism
It is essential for a JV agreement to detail how and when the JV will end. Usually, it is in the best interest of both parties to make the dissolution of the JV as economical as possible (i.e., avoid legal fees, etc.). In addition, the JV agreement must also list out all the events that might allow one or both parties to trigger a premature dissolution of the JV.
Why Joint Ventures?
Real estate development partners enter into joint ventures for the following reasons:
- Access to expertise, more resources and finance
Most land/property owners with underused properties, or run-down buildings or undeveloped parcels of land have limited resources and, therefore, cannot develop them themselves. By entering into joint venture agreements with stronger, more established partners, such people can derive a lot more from their properties/land.
Critical intellectual property and technology are among the resources that are often difficult to build in-house, so by entering into joint ventures with companies that have these resources, land owners can get access to such assets..
Most cases, the investor has the technical expertise and finance that the land owner requires to successfully develop, market and sell the project. Therefore, coming together in such ventures affords each party access to the other party’s resources for free. Financial institutions are also more likely to fund a project in which a well-known company (investor) with a good track record is involved rather than one undertaken by a new entity. Land owners also benefit in that they do not pay interest on bank loans since, as joint venture partners, most investors will provide equity financing.
- Access to larger markets and networks
Where a land owner in the real estate industry partners with an investor in the same field, they can reach a wider market than they would individually. This is because they can combine and expand their sales forces and target market, resulting in larger, more diversified revenue channels.
Joint ventures often enable growth without the land owner having to inject additional funds or look for outside investors. The parties can see each other’s customer database to market the project and their properties, and offer each other’s services and products to their existing clients. Joint venture partners can also benefit jointly buying what they need, research and development.
- Room for flexibility
Typically, a Joint Venture contract is valid for the duration of the project. However, during its validity, the participating parties do not have to cede control of their businesses to the company they form entity, nor do they have to stop ongoing operations. Each company can maintain its identity and return to normal business once the joint venture is complete.
- Accessing previously inaccessible businesses
It is common for joint ventures to be between large organisations and much younger/smaller companies or individuals who own the land but do not operate in the real estate field. By collaborating with an established company, land owners not only gain from the expertise of these companies, but also increase their credibility in the eyes of the public and potential buyers.
Many land owners who are young or new entrants in the real estate business will ordinarily struggle to build market credibility required to form a strong customer base. Entering into a joint venture arrangement with a well-known brand helps establish credibility, enabling them to engage with big players in the real estate industry, which is difficult to establish as an individual.
- Expertise, experience and knowledge gain
For land owners who are new in the real estate industry, acquiring the knowledge and expertise necessary to operate in this market is time-consuming and costly. Partnering with established companies that have the relevant expertise required for entering target markets can allow such land owners to reduce the time it would otherwise take to develop the expertise. During the execution of the joint venture, the land owners are exposed to the specialized expertise and knowledge by the investor and his team of experts and can learn from them.
- Shared resources and responsibilities
Joint ventures also have the benefit of shared risk among the parties. Undertaking a new development as an individual land owner carries a huge of risk, which many people cannot bear alone. Under a joint venture arrangement, the parties pool resources, reducing the burden of getting finances and making the requisite technical expertise less of a challenge. The risk of the project failing and having a negative impact on profitability is lower because the costs associated with the project are distributed between the parties. When a joint venture is successful, the parties share the profits as agreed. Similarly when a joint venture fails, every party bears its portion of losses.
- Save threatened property
There are instances where a land owner might wish to develop his/her land, and in addition to the lack of funds and required technical expertise, their lands is also encumbered e.g by loans, unpaid lands rates, etc. Joint Venture arrangements have seen many such properties rescued from imminent auctioning by investors who come in and shoulder/clear the encumbrances.
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