When Is a Joint Venture Right for Commercial Property Development?
A popular means of funding the purchase or development of a commercial property, a joint venture – also known as a JV – can be beneficial to all parties, although there are elements you should be aware of before you enter into an agreement.
What is a joint venture?
A collaborative joint venture involves several stakeholders, which may include:
- Property developers
Each party will contribute – and share – their capital, resources, skill and risk across the property development project. Joint ventures are based on the premise that one party needs the skills, resources or funds of the other and vice versa.
What are the types of joint venture?
There are 2 main types of joint venture:
- Profit share joint ventures – a commercial property development project is completed, a profit is made and the profit is then split between each party in shares of a pre-agreed amount
- Fixed interest joint ventures – whereby one party provides the funds for the development and another provides the skills or resources. The individual providing the funds will usually pay the other party in the form of a fixed rate of interest, rather than a percentage of any profit
Why opt for a joint venture?
One of the most frequent reasons that a commercial property developer will consider a joint venture is to provide the necessary capital to fund the development. An alternative to a bridging loan, a JV can cover the costs of the project, with the profits and proceeds split after the sale.
If you already have the necessary funding in place for a commercial development, a joint venture can also be used to provide any specialist skills which the project requires, such as architectural or design skills.
Joint ventures are generally more suited to short term development projects rather than long term. There should always be a clear exit plan in place for all parties.
When is a joint venture not suitable?
While a JV may seem ideal for every commercial property purchase or development, it may not always be the most suitable option.
You should consider if a joint venture is the right option for you if:
- It’s your first commercial property investment or development – JVs typically work best when one party has a proven method and model, then the other party can contribute a skill or resource that enables the model to be executed more effectively, or at a lower cost
- If you don’t have to use this route – if you can afford to pay for the skills of a builder, architect or other tradesperson without entering into a JV, you should do so. Similarly, bridging finance will often work out as a more financially viable option than entering into a joint venture
- You prefer to have sole accountability for a property development project – if you prefer to make the decisions on a project, it may be best to opt for an alternative funding option to a joint venture, as each party will need to be in agreement for key project decisions
What is a joint venture agreement?
Once you have chosen the parties who will be entering into the joint venture with you, it’s highly advisable to work with a solicitor to craft a joint venture agreement to protect the interests of each party.
Ahead of signing the agreement, you should:
- Ensure you’re happy to work together before the project begins
- Decide which type of JV best suits the development project – profit share or fixed interest
- Ensure all parties are clear on who will be responsible for what within the development project
- Agree on any profit shares to be allocated once the project is complete
- Agree how the venture will be secured – ideally through a contract
Once you – and the other parties in the joint venture – are happy with each element of the proposed venture, a solicitor can draft the JV agreement.