By Anita Mba
My first Joint Venture (JV) lesson happened on the job a couple of years ago, I witness a JV meeting for a proposed luxury development in the highbrow area of Ikoyi. Very exciting encounter.
Real Estate joint ventures are business agreements entered into by two or more parties who pool and combine resources to deliver a project. The concept of JV is not new to the real estate sphere. In most cases, real estate professionals/developers partner with property owners who have land in strategic areas and do not want to sell, and capital providers such as banks or individuals or groups of individuals. It’s a brilliant strategy where parties complement each other in situations where one party may not have the resources or expertise to independently embark on the project.
Key Components and Structure…
For the purpose of the JV, parties often set up an independent Limited Liability Company, an entity separate from the parties other business interests. They are on one off business agreements and once the goal is achieved, the entity ceases to exist.
Parties will sign a JV agreement which will stipulate the details of the project i.e. capital contribution of the parties, profit sharing, timelines, responsibilities and management, ownership, exit strategy, sales etc.
Location: The location of the proposed development is critical to the success or failure of a JV project. Often, the goal of real estate JV’s is to make profit through sales or otherwise. If the development is poorly situated, there will be neither sales nor profit.
Management and control: The JV agreement should detail the roles and responsibilities of the parties based on their level of expertise and contribution with regard to the management and control of the JV.
Profit Sharing: One of the most important components, the agreement must contain the distribution of profit made from the JV. Some parties may be entitled to a higher percentage as a result of their greater contribution whilst other less. There are no set out rules on profit sharing for JV, it usually depends on the dynamics and what the parties have agreed to.
Contribution: It is crucial that the agreement also set out the exact contribution each party, be it non-monetary resources or monetary contribution. The agreement needs to specify the exact amount of capital contribution expected from each member. It should also state what stages of the development such contributions are due.
Exit Strategy: This may sound unreasonable, but it is in the best interest for parties to consider their exit strategy because inevitably the agreement will come to an end and it is up to the parties to determine how and when it will end.
Risk Sharing: The reality of business is that there is a chance the business will experience loss. In real estate we win big and sometimes lose big, should this be the case in a JV project, it helps that there are parties to cushion the effect of the loss.
Talent/expertise Sharing: The different parties involved will bring their different talents and areas of expertise to the table. This way, where one lacks, the other will have the necessary expertise to complement whatever deficiencies.
Cost/Resource Sharing: Obtaining financing is for real estate developments is never easy and with banks hardly issuing loans for projects, A huge advantage is the flexibility in cost sharing amongst the parties. One party is not required to bear the burden of financing the entire project, expenses are eased when partner(s) are added. It is also applicable to non-monetary resources, for example access to expertise and knowledge and experience form partners.
Disagreements: In any type of partnership, conflicts are inevitable. Parties need to be sure that they can work together for the duration of the agreement especially when it gets tough. One way to minimise disagreements is making sure that the JV agreement is air tight, covers and protects the interests of all.
Divided earnings: Very obvious and as expected, sharing cost, risk, talent and expertise also means that earnings will be shared.
Imbalance in levels of expertise, contributions and style: Not every party will have the necessary real estate knowledge, or contributions. Although it is an advantage to complement where there is insufficiency, different backgrounds and management styles may lead to poor integration and cooperation.
To embark on a real estate JV, the layout and implementation of the agreement must be properly drafted and executed to demonstrate all parties’ involvement and protect their rights and interests. Expectations should be set with honesty, integrity and communication. The success or failure of a JV ultimately depends on the involvement of the parties as well as the preparation and implementation of the agreement.