Joint Venture Developments

Structuring a Property Joint Venture Development

A Joint Venture in a Commercial Property Purchase

In joint venture developments, both property investment and property development involve substantial financial risks. Property development is particularly risky because the economic conditions can worsen considerably in the months; sometimes years, between the purchase of the site and completion of the development.

So, although it is sometimes the case that a developer will purchase a site and develop the site itself; this normally occurs only in the case of small-scale developments. In larger developments, it is usual to find that the development will be a Joint Venture between two or more parties.

Joint ventures enable the cost and potential risks, and profits (if any), of a development scheme to be shared

So a developer might find it easier to obtain funding. More so, those wishing to invest funds (eg banks, pension funds, etc) can share in the profits of development. Rather than just obtaining a fixed return. They may also have more control over the nature of the development.

Joint venture developments enable landowners and those without particular skills in particular aspects of property development to undertake them competently. So, for example, the cleaning up of a seriously contaminated site would need the involvement of specialists. This service could always be purchased, i.e. a contractor is employed to clean up the sit. But if the landowner/ developer does not understand the issues involved; it can be very difficult to manage outside contractors properly. If the contractor is involved as a party to the venture, such problems should be avoided.

Before entering into any kind of Joint Venture, various matters need careful consideration
Property Joint Venture developments are not always carried out purely for profit. For example, a local authority might enter into a Joint Venture. He does this as a way of bringing about urban regeneration or other social benefits. Agency was specifically set up to assist these types of the landowner to get their surplus or under-utilised land redeveloped.

In joint venture developments, before entering into any kind of such venture, various matters need careful consideration. There is a need to put together a detailed business plan, along with possible exit strategies. There is a need to agree upon the duration of the venture, including terms of dissolution. Also, it is important to agree upon the arrangements for the management of the venture. These are important criteria  that must be put into consideration in joint venture developments.

There is a need for confirmation of the financial credentials of the proposed Joint Ventures. The profit share (or share of the loss) and financial contributions of each party will have to be agreed upon; along with each party’s involvement in the development works themselves. The form which the Joint Venture will take will also need to be established.

Methods Of Structuring a Property Joint Venture

A Joint Venture set up for development purposes might involve; for example, the landowner, the developer, the funder and the ultimate occupier of the completed development. There are various ways to structure such a Joint Venture. Also, the legal documentation setting up the scheme should be in place before the development site is acquired.

No one scheme is always appropriate, and the advantages and disadvantages of each option should be considered carefully. Often taxation will be of prime consideration. Additionally, obtaining specialist advice with regard to the tax implications of the chosen scheme is important.

No one scheme is always appropriate, and the advantages and disadvantages of each option should be considered carefully
Contractual Joint Venture Developments

In joint venture developments, this involves the parties entering into a contract that sets out the terms of their agreement. These will include each party’s financial commitment and duties in relation to the development, so the arrangement is very flexible and responsive to the parties’ individual needs. As there is no setting up of a separate legal entity, there is no need to transfer the ownership of the site at the start of the Joint Venture.

Therefore, there is an avoidance of a charge to stamp duty land tax (SDLT). In joint venture developments, the contract arrangement is ‘tax transparent’, so each party will be responsible for payment of income tax on its profits and capital gains tax (CGT) on its capital gains, and will get the direct benefit of any tax deductions and reliefs. Moreover in joint venture developments, as the parties are in a mere contract together, it is less likely that one party would be liable for the actions of another (subject to the terms of the agreement).

On the other hand, as there is no separate legal entity, there will be an unlimited liability in relation to any losses. Thus the failure of the Joint Venture could result in threats to the continued existence of the contracting parties.

Joint venture partnership

In a Joint Venture partnership, the Joint Venture partners will enter into a partnership agreement to purchase the property. This agreement will again regulate the way to share risk and profits and the roles and responsibilities of each partner. A Joint Venture partnership, like the Joint Venture contract, is very flexible and can suit the needs of the partners. However, unlike a Joint Venture contract, a partnership structure is recognised legally.

Note however that a statutory code in the Partnership Act 1890 governs governed this, so there is a default position when unexpected events occur.

The property will be held in the name of the partnership, so a charge to SDLT will arise when the property is transferred from the landowner to the Joint Venture partners. As the legal interest in a property can only be held by up to four people, if there are more than four partners the legal interest will be held in the names of some of those partners, with the beneficial interest vesting in all of the partners, in specified shares.

As far as tax is concerned in joint venture developments, a Joint Venture partnership is tax transparent, so each partner is taxed on its own share of the profits and capital gains separately, and each is able to choose how best to use its tax deductions and reliefs. Being a partnership, there is no requirement to file an annual return, and the accounts will remain private.

The main disadvantage is that in the traditional unlimited liability partnership, each partner will be wholly liable for the debts and obligations of the partnership, so the partners have to know and trust each other to a very high degree. Moreover, each partner will have the authority to bind the partnership and its co-partners when dealing with third parties.

However, in joint venture developments, parties can now choose to use a limited liability partnership (LLP). The LLP is a corporate body with a separate identity from the members, and the LLP itself is responsible for any debts that it incurs, rather than the individual members. Joint venture partnerships have been commonly used to acquire property and are preferable to a simple contractual relationship where a contemplated long-term, complex project.

Special Purpose Vehicle Companies

This is a limited company set up for a particular purpose, eg to develop a particular site. The special purpose vehicle company (SPV) may be a subsidiary of just one company, but it can also be a jointly-owned subsidiary of several companies. The companies that set up the SPV are shareholders. Also, they have all of the usual rights of a shareholder. Different companies can invest different amounts in the property that the SPV purchases and receive differing profit shares.

In joint venture developments, certain matters can be customised in a shareholders agreement, in default the company law will govern the arrangements, which is a tried and tested framework with which the parties are likely to be familiar.

A key advantage of using an SPV is that the SPV will have limited liability. This means that the risk of a particular business venture can isolate from the other businesses of the companies involved. If the property investment turns out to be a very bad one and the SPV becomes insolvent, the other interests of the shareholding companies will have protection.

A key advantage of using an SPV is that the SPV will have limited liability

Another reason for choosing an SPV is that on completion of the development, it is possible to transfer ownership of the property by selling the shares in the SPV company, rather than by transferring the property itself. The benefit of this comes from the charging of stamp duty.

How Brickstone Can Help?
Brickstone is an Infrastructure Accelerator with strong competence in early-stage project development for large industrial and infrastructure projects.
In executing our advisory process Brickstone combines investment acceleration, capacity building and hands-on advisory skills to navigate the complex structures which characterize today’s financial markets and an unsurpassed creative approach that differs from the traditional consulting firm.

Why not contact us to make your Project Happen

Our advisors and consultants would be able to schedule an online meeting with you to discuss your project with the overall objective of seeking ways to achieve the “bankability” and protection of the long term asset value of your project.
Request a Meeting Now

Leave a Reply