Joint ventures (JVs), development agreements, profit-sharing agreements, partnerships, option agreements, preferential loans, and other arrangements are common terms used when starting a property development project. The most common structure used in a development project is a joint venture.
Where JVs are documented correctly, they can be a highly profitable vehicle. However, without the terms of a JV being clearly defined, they are often a source of problems and costly litigation. Accordingly, this article will give a simple overview of JVs and discuss some common traps and pitfalls before formalising the agreement.
1. What is a joint venture?
Although developers have a fair understanding of how a joint venture works, most will have a difficult time distinguishing it from other land development arrangements such as a profit-sharing arrangement, a partnership, or otherwise. The reason for that may be because the expression ‘joint venture’ has different meanings depending on the context. In a land development context, the following indicators are usually present:
• An association of persons formed with a particular purpose for a single project & not an ongoing business
• Roles & responsibilities for each participant are defined.
• The participants pool their assets to the project usually a block of land, funds or development expertise.
• Asset ownership is retained by the participants as tenants in common.
• Participants take a share of the venture product or output as opposed to solely the profits.
• The services of a project manager or development manager are retained for reach key milestones.
• No participant has authority to contract on behalf of the other(s).
Joint ventures can either be incorporated (i.e. through a special purpose vehicle) or unincorporated.
As there are significant tax consequences between joint ventures and partnerships, it is crucial to get legal and financial advice from the outset.
2. Tips and Traps
In the world of land development and indeed any commercial transaction, problems can arise. JVs often comprise of separate companies with different backgrounds which can affect the share of profit (or loss). Although there are risks to every land development, there are ways you can reduce that risk. So, I will share some tips on what your JV agreement should provide.
• Do your homework on each participant – ask for business references, look at other projects they have
undertaken. You need to ensure they are financially sound & commercially driven.
• Ensure your JV agreement includes dispute resolution provisions for deadlocks & impasses.
• Decide on the role & responsibilities of each participant in fine detail so that there would be no
• Obtain both financial, tax & legal advice in relation to the JV. As noted above, there are significant tax
consequences depending on the structure.
• Recruit a project/development manager who has experience with the type of project you are undertaking
(i.e. residential, commercial, medical, industrial, petrol station with retail etc.)
• Set milestones & dates for the project with key performance indicators for each participant.
About Author: Shannon offers sound legal advice across a broad range of property, commercial & financial transactions & provides efficient & effective legal solutions for clients within a complex commercial environment. Shannon has a background in the Property, Commercial & Securities law. His experience is in residential & commercial conveyancing, the sale & purchase of businesses & retail & commercial leasing. Shannon has previously acted for banks, credit unions & other major financial institutions on a range of commercial, residential & business transactions.