A Joint Venture in a Commercial Property Purchase
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, and those wishing to invest funds (eg banks, pension funds, etc) can share in the profits of a 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, ie a contractor is employed to clean up the site, 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 Ventures are not always carried out purely for profit. For example, a local authority might enter into a Joint Venture as a way of bringing about urban regeneration or other social benefits. Agency was specifically set up to assist these types of landowner to get their surplus or under-utilised land redeveloped.
Before entering into any kind of Joint Venture, various matters need careful consideration. A detailed business plan will need to be put together, along with possible exit strategies. The duration of the venture will need to be agreed, including terms of dissolution. The arrangements for the management of the venture will also need to be agreed.
The financial credentials of the proposed Joint Ventures will need to be confirmed. The profit share (or share of the loss) and financial contributions of each party will have to be agreed, 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 in which such a Joint Venture can be structured, and 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, and specialist advice should be obtained with regard to the tax implications of the chosen scheme.
No one scheme is always appropriate, and the advantages and disadvantages of each option should be considered carefully
Contractual Joint Venture Developments
This, in essence, involves the parties entering into a contract which 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, so a charge to stamp duty land tax (SDLT) is avoided. The Joint Venture 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, 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 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 in which risk and profits are shared and the roles and responsibilities of each partner. A Joint Venture partnership, like the Joint Venture contract, is very flexible and can be tailored to suit the needs of the partners. However, unlike a Joint Venture contract, a partnership is a legally recognised structure, governed by a statutory code in the Partnership Act 1890, 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 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, 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. As 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, 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 long-term, complex project is contemplated.
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 in it and 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. Although certain matters can be customised in a shareholders agreement, in default the arrangements will be governed by company law, 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 be isolated 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 are protected.
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 way stamp duty is charged.
How Brickstone Can Help?
Brickstone Partners is a Project Finance, Development Advisory and Asset Management firm helping Sponsors of Large Scale Asset backed projects with the overall objective of ensuring the “bankability” and protection of the long term asset value of these projects.
Our specialist Project Finance Team will help build tailored financial models conducting analysis thereof in conjunction with our Market Feasibility Experts. This provides your clients with precise bankable projections calculating all the capital investment requirements, the cash flow analysis and the rate of returns for these developments.Download Profile