Joint ventures: The benefits and implications for RPs and developers explained28/07/21
Unless funded entirely by a single entity, property development usually requires a formal collaboration between two or more parties with a view to promoting a common interest and achieving a particular outcome, a joint venture (JV). The aim of this structure is for each party to achieve a better result working together because they can pool more resources, assets and expertise than if they had ‘gone it alone’. RPs have not been strangers to the JV model but in recent times have intensified the participation in JV structures.
At our recent webinar we discussed some of the considerations for RPs and developers before entering into a JV, as well as the benefits and different structures. In case you missed it, we set out some of the key points below.
Points to consider before entering into a JV
The different structures allow for various parties to participate and contribute in different ways, whether by contributing cash, tangible assets like land, or intangible assets such as construction services or other types of expertise. From the outset, careful consideration should be given to the purpose of the JV, the parties’ commercial and strategic objectives, and the particular role that each party should play. Other questions you should consider include:
- Liabilities: to what extent are the participants prepared to incur liability or risk their assets to 3rd parties and/or to each other?
- Duration: how long do the parties anticipate the joint venture will last? Is it a one off transaction or is the intention to build a long-term relationship over multiple projects?
- Governance: who will take and manage decisions on key strategic aspects and investments, e.g. deciding on what land to acquire, prices, delivery and disposal strategies?
- Confidentiality: which structure would best meet the joint venture’s needs?
- Charitable status: are there any restrictions on the RP entering into the JV or adopting a particular structure?
- Procurement issues: is the contract for works above the permitted threshold?
The benefits of entering into a JV
Benefits for RPs:
- Provides an opportunity to RPs to tap into the skills and expertise pool of an established developer
- The developer manages the planning, development and sales process
- Cost savings
- The developer will have greater access to land
Benefits for developers:
- Access to better funding
- The RP will have significant expertise in community engagement and housing management expertise
- Access to sites and frameworks, i.e. an RP can help facilitate the grant of planning permission via the close ties they have with local authorities and may be able to negotiate the provision of offsite affordable housing
- Risk sharing
Structures of JVs
Creates a contractual relationship where one party provides a service to the other for a share of the profit. The JV arises out of the parties’ shared objective, which is documented between the parties to a development project in contractual documents such as a development agreement. There are various different documents which can be used which were discussed together with the advantages and disadvantages of each.
There are different commercial vehicles to set up a company or partnership and during the webinar we discussed the Limited Company and the LLP models.
Limited Company advantages:
- Separate legal entity offering limited liability to members and allows assets and liabilities to be ring-fenced
- Allows the creation of floating charges which increases scope for offering various security packages and share and loan capital
- Allows the scheme to be removed from balance sheet
Limited Company disadvantages:
- Not tax transparent
- Although benefitting from limited liability, external investors/funders are likely to require a form of personal or parent company guarantee
- No confidentiality as company documents accessible to the public
Consists of two or more legal entities, and these may be individuals or companies, known as members of the LLP.
- Tax transparent
- No requirement to contribute to capital
- Off-Balance Sheet borrowing
- Ring-fencing of liabilities
- Retirement of members
- Inadvertent SDLT charge when members change their income/capital entitlement or on the admittance
Careful consideration is to be given to help create a structure that not only meets the technical, operational, financial, regulatory and legal requirements of the venture but also captures the underlying commercial objectives of the individual participants. The parties should also take the time to have in depth discussions regarding their aims and objectives to make sure there is agreement to avoid disputes further into the JV.
How Capsticks can help
Our Housing & Regeneration team, one of the largest in the country, advises on all types of development transactions from forward funded schemes, section 106 developments and stock rationalisations to plot sales and general asset management work. We are experts on the formation of joint ventures and other entities to facilitate smooth development processes, combining our experience in the housing sector with corporate and commercial.
If you have any queries around what's discussed in this article, and the impact on your housing organisation, please speak to Chimi Shakohoxha, Ryan Campbell or Rita Saadeh to find out more about how Capsticks can help.