A guide to Joint Ventures

The most common interpretation of a joint venture (JV) conjures up the image of a land owner who does not have the required experience to access a development loan, and so needs to team up with a developer who ticks that particular box. Or, perhaps the developer who cannot satisfy the mainstream development finance lenders criteria due to some adverse credit history, and therefore needs a private investor to fund the project costs. Another scenario is where a developer’s resources are tied up in on-going schemes, and they want to take advantage of an opportunity site which has been presented to them by utilising finance from a private investor.

Exactly what the agreement might be between the developer and the investor or partner really can vary. Interest is often charged on the funds deployed, with net profits being split 50/50, or alternatively a set return on investment is agreed upon, with the developer taking whatever is left at the end. Suffice to say, a profit share is always required by the investor fronting the costs.
The terms JV and Equity are often used interchangeably dependent on the developer’s experience (or lack of) with such forms of finance. Joint Venture is where two individuals join together for a specific combined venture for a defined period of time. Equity participation traditionally might have been seen as more “permanent”, given that finance is raised via the sale of shares in a company, but as developments are usually undertaken in an SPV, this isn’t necessarily the case. Equity participation agreements can now be much simpler than they were historically, and are often used in combination with debt funding, to take the place of a mezzanine loan.
So why would someone want to Joint Venture? The risks of development projects can be high, but the profits can be too. The investor might well require a priority return, plus a share in the ultimate profits, but the developer will also be adequately incentivised.
Who are these JV partners? Often they are High Net Worth individuals or experienced investors looking for a good return on their money. They might be ex-developers, or accountants investing their client’s money. Some established development finance lenders will also partner up with an existing client and fund 100 per cent of costs, if the right deal is presented.
In a recent deal on a development project in an affluent area in Yorkshire, the experienced developer had sourced a plot of land with planning permission for seven houses. He needed £500,000 to build the first phase of the scheme, but had no available cash to contribute. The JV partner offered the full £500,000 for a 50 per cent share in the profits. There was no interest charged on the funds deployed, as the JV partner was happy with a share in profits.
Are you looking for a JV deal? As always, seek the help of a development finance expert.

John Waddicker

Positive Commercial Finance

www.positivecommercialfinance.co.uk

 

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