Joint venture real estate development finance

Joint venture finance gives you the funds needed — to develop a real estate project.

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What is joint venture property development finance?

A joint venture (JV) is essentially a partnership of builders, finance houses and developers. They partner with each other, to develop specific real estate projects. For example, a JV may be created when one party has the land — but needs another party to come in and develop it.

There are several types of joint venture, and even more reasons for wanting to enter into one. However, when it comes to real estate development, there are three primary driving factors for seeking JVs — namely: access to land, finance and skills.

Unlike other more conventional forms of property finance — a JV allows you to access up to 100% of the development costs — of a project.

Large real estate projects are typically financed and developed through joint ventures.

Real estate joint venture finance — considerations

Real estate development is a very cash intensive business, as it requires most of the money to be spent upfront — before any revenue can be generated. Even relatively small projects, need millions of Naira invested — making it easy to see why builders or developers, seek partners that can bring in the money.

Joint ventures are an increasingly popular way of raising funds for real estate projects, particularly for smaller or newer developers — that lack experience. This lack of experience, results in them struggling to get access to traditional bank loans.

With a JV, developers are able to invest only a fraction of their own capital — leveraging this up to get access to a larger amount of development finance.

As capital is not tied up in only one project, JVs also enable developers to finance multiple projects — all at the same time.

Joint venture capital funding can be utilized to facilitate a variety of different development projects such as:

  • Houses
  • Apartments
  • New builds
  • Extensions
  • Conversions
  • Mixed-use developments
  • Commercial developments

Joint ventures work in different ways — depending on the project at hand. The smaller the project, the less suitable structuring complex joint venture agreements is. This is primarily due to the legal costs of establishing the venture. These costs are likely to dent any future profits made.

Larger real estate projects, involving more variables, generally need more complex arrangements — to ensure all parties to the JV do as contractually required.

Key factors to consider before coming to any JV agreement include:

  • Relationships
  • Liability
  • Funding arrangements
  • Flexibility
  • Tax
  • Governance or project management
  • Confidentially
  • The exit (how are you going to sell the developed unit(s)?)
  • Profit sharing

How does joint venture finance work?

It is the real estate project on offer, that mainly determines the type and degree of joint venture funding required. Your needs will usually fall into one of three primary development categories — namely light works, major renovation and ground-up development.

A major renovation or developing a project from the ground up, may require you to create a separate business entity, or special purpose vehicle (SPV) — to which parties to the JV contribute assets and have equity.

At a basic level, parties to the deal would be you the developer i.e. the operating member and the lender or investor i.e. the capital member.

Capital members may invest their own personal funds. Alternatively, they may be able to raise development funding — on the back of their track record.

Once a deal has been struck, the capital member can then release funds — based on the development schedule and you reaching specified project milestones.

Upon project completion, and based on the sales of developed units — each party gets a share of the profits. Common JV sharing agreements include 60 % developer — 40% financer. 50 / 50 splits are also common.

It is important to note, that this is just one example of how a joint venture works, as there are multiple ways of structuring one. For instance, JVs can be structured where one party simply provides the land — while the other party sources the funds and manages the project.

Benefits of joint venture finance

  • Land and development costs can be 100% fully financed
  • Allows you to work on several projects — concurrently
  • Enables you to work on large projects — you would otherwise have not been able to
  • Potentially greater returns on investment
  • Both parties share the risks

Limitations of joint venture finance

  • Contracts can be less flexible — hard to exit
  • Conflicts of interest
  • Uneven division of work and resources
  • Unreliable partners
  • Unrealistic expectations

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