What is a real estate joint venture (JV)?
A joint venture is formed in real estate when two or more parties pool their resources for a specific development or investment. In a joint venture, the partners keep their separate business identities while working together to complete a transaction.
In a joint venture, tasks can be assigned that are appropriate for the project in any way. Profits are split in the same way if the parties agree.
Two developers may partner up to finish a vast project for each of them to handle alone. Alternatively, a real estate investor may form a partnership with someone who has the financial means to fund a transaction that the investor cannot complete on their own.
Learn here about the joint venture of Park View City.
The Joint Venture Methodology
The steps in forming a joint venture are as follows:
The first phase is always appraisal, and it usually starts with a site visit by the developer to determine the property’s location, accessibility, infrastructure availability, soil type, terrain, and other development-related considerations. Following that, the developer will do a feasibility study to determine the optimum use of the site, project expenses, revenues, and the potential returns on such an investment.
The developer will then present the landowner with a proposal that includes the planned concept, budget, revenue, and profit-sharing between the two sides.
Legal Due Diligence
When a landowner accepts a developer’s proposal, they must provide copies of the land title deed, and deed plans to the developer’s advocate for verification. The advocate will perform a search to verify the legitimacy of the title document, actual ownership, and the absence of any encumbrances on the property. Following that, a surveyor will examine the beacons on the ground and certify that the acreage on the title corresponds to the acreage.
The developer writes a Joint Venture Agreement (JVA) and delivers it to the landowner’s advocate once due diligence is complete and satisfied. An agreement defines all possible situations that could cause conflict and forges a road forward if things do not go as planned, which is one of the numerous obstacles that come with a JV. Some of the most common clauses found in a JVA are as follows:
- Each party’s capital liabilities,
- The managerial structure of the partnership,
- Each party’s rights and responsibilities,
Exit and transfer rights relating to the sale or transfer of membership interests in the JV, downside protection for the land value supplied by the landowner, and profit-sharing method
Once both parties have agreed to the terms and conditions, they sign the agreement.
Formation of a Special Purpose Vehicle (SPV) – When a JVA is signed, a particular purpose firm is formed to carry out the JVA’s objectives. The registrar of companies then registers the firm as a private Limited Liability Company (LLC) or a private Limited Liability Partnership (LLP). ,
Transfer of Land to the SPV: Once the business has been founded, the landowner must provide the title deed and other necessary documentation for transferring land ownership to the SPV.
Project Start-Up: The developer then begins the project’s execution by assembling the project team, including the architect, project manager, engineers, and other consultants. The developer is in charge of the project from start to finish.
Project Completion: Once the project is finished, the landowner and developer split the profits according to the conditions of the JVA. Profits might be distributed in the form of cash or units like houses or apartments.
Benefits of a Real Estate Joint Venture
Joint ventures allow a group of people or companies to combine their resources to complete a transaction. Each party may be lacking in experience, knowledge, or capital compared to the other. They’re able to close sales by collaborating on targets they wouldn’t be able to reach on their own. Giving up some ownership in an investment can often be justified if it allows you to close the acquisition and expand your real estate portfolio.
Joint ventures also offer an advantage over partnerships in that each party maintains its legal entity. It can limit each entity’s involvement in the specific project on which they’re collaborating.
The advantages of a real estate joint venture are:
- Resources that are shared.
- Additional funding is available.
- Expenses are shared.
- Risk is shared.
- Additional information and expertise are available.
- Added trustworthiness.
The Disadvantages of a Real Estate Joint Venture
Of course, there is no one-size-fits-all approach to real estate development or investment. It’s always important to consider the benefits and drawbacks of each method concerning the deal.
Some developers and investors have a difficult time collaborating with others. Some people prefer to be in charge of all situations, while others struggle to make decisions.
The disadvantages of a real estate joint venture are:
- Total lack of control.
- There is less equity.
- Profits are shared.
- Disagreements could arise.
- Conflict resolution is a difficult task.
- Obligations that may or may not be met by the other spouse.
- The terms of the project are not established.
It would be best if you were cautious about whom you pick to form a business partnership. Business procedures and personalities can collide, putting the deal in jeopardy.
Working through the joint venture agreement with a business attorney to handle any potential difficulties you didn’t think of is always a brilliant idea. Having problems after the agreement is signed can be a significant problem.
Muhammad Junaid is a senior Analyst and Search Engine Expert. Extensive experience being a lead writer in Estate Land | Taj Residencia. Work for years with local and international enterprises. Also, represent well-known brands in the UAE.