Thinking about Joint Venturing on a Property Project?
Joint ventures can be a great way to undertake property development projects, particularly if you don’t have the funds, time, know-how (or confidence) by yourself.
BuildHer8’s Rathmines Project, which is building at full steam, has drawn a lot of interest from our DevelopHer community in JVs.
For many, it is a logical next step. Pulling resources to achieve a common goal!
But there’s far more to setting up a successful joint venture (JV) than finding like-minded people. You really need to understand what you’re signing up for, and ensure contingencies are in place to prepare for the unexpected (hello global pandemic).
Here are some insights from our experience.
Joint venture Agreement
A joint venture or JV is simply a temporary commercial agreement between two or more parties to work together on a specific project. The Joint Venture Agreement sets out the details of the JV and we strongly recommend having one drafted by a good lawyer.
Did you know … a JV itself is not a legal or tax entity / structure?
Here are a few things that you should ensure the agreement covers:
- Are the purpose, approach and desired outcomes of the JV spelt out?
- How will decisions be made, and who is managing the development?
- If funds are pooled, who has financial control, and how will expenditure be reported?
- What are the exit strategies (best and worse-case scenarios), both once the project is completed, but also if there is a dispute, or one party seeks to terminate the JV? It’s best to have an exit plan for every stage of the project.
- How will profits or losses be split? What are some outcome scenarios?
Structure it right from the start
It’s common for JV partners to utilise a range of legal / tax entities to support the JV, such as unit trusts or companies, and this also needs consideration:
- What names will be recorded on assets such as the land title? What is the risk if you’re not named on title?
- What are the tax implications of your chosen entity?
- Funding (this is a BIG one!) – how will lenders view the structure? This can become an issue if a bank or lender wants to qualify each and every JV partner, assessing everyone’s credit worthiness and serviceability. Your individual lending capacity may also be diminished down the track where a bank might treat the full loan amount as a liability, not just your portion of the loan.
- What protection do you have if a JV partner gets into financial difficulties?
And finally, it’s important to have a clear understanding and legally document each JV partner’s expectations.
- Are the commitments and responsibilities of each JV partner outlined clearly? What you think you’ll be doing may not line up with what others think.
- Or do you want to be a passive investor with no active involvement?
All of these should absolutely be dealt with before entering into a JV, rather than halfway through. Your best friends to help you should be your tax accountant and legal advisor, and of course, the support of our BHC DevelopHer Community.
It’s important to obtain your own financial and legal advice if you’re considering a JV. The information provided here is general in nature, and does not constitute legal or financial advice.
Written by the lovely Louise Van Zelm, one of our DevelopHer Masterclass Graduates and Head of All Things Numbers in the BuildHer8. Louise has had an amazingly diverse career – at the age of 20 she was the first female to be appointed as a forex trader in Australia. Other opportunities have included corporate and real estate sales, operations management roles through to organisational transformation consulting. Having recently retired, Louise is relishing the opportunity to follow her passion for property and the transition from property investor to actively developing.