Looking at commencing or sourcing funding for a property development? A joint venture (JV) can be an effective way to achieve the funding goals you need without engaging with a bank, or as an additional source of capital to work alongside a bank. But there’s a bit more to joint ventures than just engaging a wealthy JV partner to back your project.
It is vital that you seek legal advice with a JV prior to going forward because while things may be amicable while you are starting out, situations can change quickly. It is important that both parties’ interests are protected at all times. Legal advice before you get started can be the difference between a costly and protracted legal proceeding, and an amicable resolution of issues.
We’ve written a guide to the basics of joint venture agreements in the hope that it helps you gain a greater understanding of this opportunity and consider whether a JV is right for you. At McAndrew Law, we have a great deal of experience in working with all manner of property development projects and can advise you on your upcoming venture.
If you would like advice, call us now on (07) 3266 8555 to speak to our team, or get in touch online and we will get back to you.
What is a joint venture?
A joint venture is a type of agreement where two or more people combine assets, resources, or skills to complete a project. A joint venture in property development usually sees the combination of a financial backer with a developer to complete a project.
- People enter joint ventures to have access to the resources that the other person has so that they can complete their projects.
- Both parties need to come to the agreement with something of value to offer, which is the ‘carrot’ for each party to participate.
What kind of joint venture can I enter?
There are a variety of joint ventures that people can enter, but the most common types of joint ventures that are seen in the business world are profit share joint ventures and fixed interest joint ventures.
- A profit share joint venture sees both parties share the profits in an equal or pre-determined portion.
- A fixed interest joint venture sees a financial backing party agree to take a certain annual rate of interest on their capital. That is, if a person invests $100,000 in a project and agrees to receive 10% interest annually, and the project takes 1 year, they receive $110,000 back from their investment.
When should I avoid a joint venture?
In many cases, a joint venture can be a deeply rewarding experience that provides opportunities you otherwise could not have seized. In some cases, a joint venture can be messy and complicated. It might be wise to avoid a joint venture in the following instances if you can:
- If you are commencing your first property development project – because while you may think you know how to start and complete your project, the reality is that things may turn out very differently than you originally thought when you started. And if you’re going to make mistakes (which it is possible that you will – at least in some way), it’s better to make those mistakes without someone else watching over your shoulder .
- If you do not need to enter a joint venture! If you can afford to complete your project on your own, it is likely to turn out better for you financially to do so.
- If you do not like to work with other people and run decisions by them. A joint venture is just that: a venture with one or more other people, which means you need to consider them in your decision making.
How to get started with a joint venture?
It is fairly straightforward to get started with a joint venture for property development. Whether you are the party with the capital looking to fund, or if you are the developer or builder who wants to do the work, the best places to start are networking events, your network of family and friends, and by asking any property professionals you may already know.
- Everyone you know is a potential contact to meeting a new partner for a joint venture in property development.
- If you are the one with the capital looking for a project, make a point of talking about the projects you’re currently investing in and how they’re going. You’ll find that people will soon start to suggest joint ventures to you!
- The one with the skills will need to make the first move in asking for capital. But again, keep an ear out for people talking about their projects and don’t be afraid to suggest possible projects to them. The worst they can do is say no.
How to create a joint venture agreement
This is a vital part of going into a project with someone else. You need to set up your joint venture agreement so that neither party runs the risk of falling foul of any situation. It’s imperative that you take the time to get to know your potential new partner and have at least a few meetings with them. You don’t need to become best friends, but you do need to be able to get along and make decisions together.
- Decide what type of payment structure you want to focus on (profit share or fixed interest?) and then agree on who is going to do what in the project. If both parties are committing time to the project, then be clear about how much time each person will be putting in.
- Make an agreement where you discuss everything that could possibly go wrong with your JV and then mitigate these situations with agreements. Things like property prices crashing, what to do if you cannot sell, and what happens if you go over budget all need to be considered.
- Consider how you will secure the interest of each party – are you going to buy in joint names, or form a company with both partners as shareholders and have the company buy the property?
What you decide on will depend on your taxation situation, your income, your circumstances and so many other factors. At any rate, it is vital that you have a solicitor who is an expert in property development to draft your joint venture agreement. A solicitor can advise you and be able to define terms using their precise legal meanings to ensure you are both protected.
Want to know more?
At McAndrew Law, we are experienced in drafting joint venture agreements and can ensure that your interests are protected from start to finish. Call us on (07) 3266 8555 or get in touch with us online to get started. We offer a FREE initial consultation to discuss your needs.
You can also check out our advanced guide to Joint Venture Agreements here:
