If you’re struggling to establish a career in property development due to a lack of finances or limited connections and experience, a joint venture could provide the support you need to get up and running in 2021.
What is a Joint Venture?
There are several types of joint venture (JV), but they all involve at least two parties combining their resources to fund a commercial enterprise and achieve a common set of goals. Each partner retains their distinct identity but benefits from an increase in efficiency and budget as well as a lower financial risk.
The Benefits of a Joint Venture in Property Development
- Access to Land. Finding and securing land for development can be extremely challenging and time-consuming. Sometimes, a JV is the only way to obtain development rights over a particular piece of land.
For example, if you lack the experience and resources of a larger development company, the landowner may insist that you partner with a more established developer before they will allow you to proceed with the project.
- A Low-Risk Means of Expansion. If you’re looking to expand your property development business into new markets and networks, partnering with someone who has expertise in this area will lower the risk.
Your partner will be able to advise you on the best investments and ensure that all relevant regulations are adhered to.
- Secure the Funding You Need. So, you’ve found the perfect development opportunity but lack the funds to turn the dream into reality? Entering into a JV is a great way to secure the property development finance you need, either directly by partnering with a company that can fund the project or indirectly by securing a finance agreement that you could not obtain on your own.
- Boost your Skills and Knowledge. By choosing a partner with a complementary yet different set of skills and experience to your own, you open up a fantastic opportunity to learn and grow the business. A JV may provide access to a whole new team of staff, each with something to offer in terms of technical expertise and specialised knowledge.
- Enhance Your Brand. Partnering with a more established developer can work wonders for your company brand. It can take years to establish a name that customers trust. Entering a JV with the right partner can give your credibility a serious boost and increase your market visibility significantly.
What are the Different Types of Joint Ventures?
- Contractual Development Agreements. This is one of the most common JV structure in the UK. Multiple parties sign a contractual agreement to complete the planned development.
This type of agreement is generally quick and easy to set up. Each party is taxed on their individual profits and retains its own debt liability — unless a clause is included to state otherwise. The partnership does not form a legal entity which can make raising funds difficult. The partnership may also result in a higher level of risk.
- Private Limited Company. This may also be called a “JV company” or a “special purpose vehicle (SPV)”. This is another very popular type of agreement in the UK. The creation of the partnership forms a private limited company and the partners become shareholders.
This is a very flexible option because the company can specify each partner’s share rights depending on their level of investment and the formation of a legal entity means that the partnership can own assets. If one partner chooses to leave the company, they can sell their shares and assets to the new partner. However, there is more administrative red tape involved due to reporting and compliance requirements and the need to ensure that partners are taxed correctly.
- Partnership or Limited Company. This type of partnership can be formed without a formal agreement. The parties involved unite to deliver projects that turn a profit.
The lack of formality makes this structure extremely flexible. The partners can draw up their own agreement and each individual is taxed, rather than the partnership as a whole. However, there is a high level of risk involved — a partner has unlimited liability. A limited partner assumes less risk but is not allowed to undertake a management role. Furthermore, securing finance can be difficult as the partnership is not a legal entity.
- Limited Liability Partnership (LLP). An LLP establishes a separate legal entity and each partner is taxed on the profits of the partnership. Liability is limited for each party involved.
The cons of this structure are the extra admin required for reporting and compliance measures as well as potential difficulties in securing property development finance.
Important Factors to Consider Before Entering a Joint Venture
Before deciding on the structure of your JV, or whether such an arrangement is the right solution for your property development business, ask yourself the following questions:
- What is the relationship between the proposed partners?
- What is the primary purpose of the planned partnership?
- What type of project or projects will the JV undertake?
- How will the partnership secure funding?
- What level of investment will each partner contribute?
- How long does each party foresee a need for the JV?
- Is there an exit strategy?
- How much flexibility does each partner require?
- What are the tax implications of your chosen type of JV?
- How will the planned project(s) be managed?
- What role will each partner play?
- How important is confidentiality to each party?
A Joint Venture can be a savvy move for property developers looking to branch out into new markets, enhance their brand, access new land, increase the budget and expand their skill set. But there is no one-size-fits-all approach, and each prospective partner should do their research into whether a JV will help them achieve their goals and if so, which structure is the most suitable for doing so.
As the economy continues to struggle amidst the impact of COVID-19, 2021 will be a challenging year for developers. A joint venture could be the perfect property development finance solution to help your business thrive and grow.