If you find your next property development is beyond your financial capabilities then you need to explore financial options. Or you could be aiming to grow your business by taking on larger property developments where you don’t have a track record.
Let’s look at a couple of options:
A developer is looking for finance options to support their next property development of a block of 9 apartments. Cash flow within the company and current development projects are restricting their ability to finance the development. Track record of successful developments of similar size and value.
Potential partner could be:
Benefits of a JV
A developer is wanting to expand their capabilities and take on bigger projects. From building blocks of apartments (usually 6 units) to delivering a housing development of 15 single units is the planned expansion for the property development company. Not able to demonstrate the right experience of this type and scale of development.
Potential partner could be:
Benefits of a JV
In reality, it is often a combination of a number of parties – each bringing a different skill set – so the partnership can be a mix of developers, architects, building companies, and finance houses.
It is important for you to take legal advice before signing up to your JV agreement which is a legally binding contract. You will need to set out who has responsibility for each aspect, how expenses are to be deducted and what the agreed expenses are, as well as clarifying the share of profits or agreeing a fixed rate.
But have you thought about:
A Confidentiality Agreement – this is a valuable tool to protect shared information. You will need to include provisions for non-competition clauses for information that could be used at a later date when the JV is ended.
Data protection – because of GDPR regulations and the large fines that can be issued for breaches of date protection rules, you need to decide what data the JV company will process and if each party will process any data separately.
Copyright licence – making sure all relevant parties, who need one, have a copyright licence over the project designs and a contractual link to the designers.
Provision of service to the JV – if one party (or shareholder) is providing a service to the JV vehicle, everything needs to clearly recorded and transparent – such as the contract terms and obligations. This is good practice for audit purposes.
What could possibly go wrong – we all know that things can go wrong so it is best to discuss some worst-case scenarios and agree in advance how you would overcome them.
Tax advice – to decide on the right JV you are well advised to take advice from an accountant or specialist tax advisor to determine the best option in your circumstances.
Exit the JV early – like at the start of a marriage when you are not planning the divorce, it is not your first thought as to what will happen if anyone wants to exit the JV. Setting out clear guidelines will, however, avoid future disputes on the value and transfer of shares to a third party should a JV end early.
There are number of options for the type of JV that you decide to use, but they all have the same underlying principle, whether you are undertaking residential or commercial properties. Two or more partners are pooling their expertise (finance – design – build) to deliver a project effectively and efficiently with a prescribed ROI – whilst at the minimum risk.
Let’s look at your options!
This term covers a range of legally binding agreements typically between developers, landowners, purchasers, and funders.
The most common JV is a private limited company often referred to as a Special Purpose Vehicle (SPV). This means it is set up for one purpose and the focus is all given to the development project.
As the name property development partnership agreement implies, it is two or more parties entering into an agreement to undertake a property development. It is not as legally restrictive as other arrangements.
In essence, this option is a mix of a limited company and a partnership, in that it is a separate legal entity and liabilities are limited for each partner but profits are taxed on an individual basis.
A few questions to ask before jumping into a JV on your next development project:
Joint Ventures can be an excellent option.
For developers, it creates an opportunity to access finance and to maximise their own financial resources to develop more schemes side by side. On some projects an experienced property developer can show-case their skills to support those newer to property development which enhances their own reputation.
For investors, they get the excitement of being involved in property development without the need to manage the construction on a daily basis. They get the opportunity for a good return on investment in a short period of time.
A great collaboration which can be beneficial to all parties.
Note: This blog is for general purposes and guidance only and does not constitute legal, tax or professional advice. You should seek legal and tax advice before relying on its content.