What can a person do as the owner of land before entering into a joint venture agreement with a real estate developer?
1. what is a joint venture agreement between a real estate developer and a landowner.
At least two parties establish joint ventures with the objective of achieving a particular investment return. Unlike several other business agreements, when the goal is reached, the joint venture is usually terminated.
Understand the Following attributes of a joint venture agreement:
- Risk sharing: A single investor may be unwilling to undertake a real estate venture because of its size, location, capital requirements, and duration. But, by sharing the risk, two or more parties may be willing to begin the venture.
- Combining expertise with capital: Joint ventures are basically formed as a way to pool equity capital from one or more sources and a means of bringing parties with different expertise to the venture. A joint venture could also include purchasing existing properties and operating them. In this situation, one of the parties may be responsible for leasing, acquisition, management and others may give capital.
2. Organizational forms
Participants in joint ventures may comprise any combination of individual investors, corporations, partnerships, or trusts.
- Nevertheless, a joint venture in and of itself is not a legal form of company.
- To specify capital contributions, duties, rights, profit sharing, and the like, a joint venture agreement or an industry entity must be created.
- The choice of an organizational form used to accommodate those various groups of investors could be a corporation, partnership, Pvt. Ltd and trust. Partnerships are commonly the vehicle of choice in the estate joint venture.
3. Profit sharing
Because the parties to a joint venture may contribute various things, and possibly in distinct proportions, a partnership must be structured so that it renders economic incentives for all participants. Differences in tax status of investors also may influence the way partnerships are structured.
A joint venture can take on many different partnership forms. The most well-known is the limited partnership. As in the case with all organizations, there must be at least 1 general partner and any number of limited associates. Usually, in real estate, limited partners are the investors that present most of the equity capital, while general partners are generally responsible for managing the partnership assets and may offer a relatively small portion of the needed equity capital.
4. Potential investors analyze following factors for structuring a joint venture agreement.
- How much initial capital will the participants contribute and how will the parties contribute additional capital if demanded in the future?
- How will the participants share in the annual cash flows to be generated from operating the property?
- How will the parties distribute in the cash flow received from the sale of the property?
- Will some of the parties obtain a preferred return? Will the preferred return be paid from annual cash flows and sale?
- Will capital gain (or loss) and taxable income (or losses) be shared in the equal proportion that operating cash flow to be distributed?
- Who will have authority over the operation of the property and decisions involving approving leases to tenants, financing and possibly refinancing the property, capital improvements, and when to sell the property and land?
5. Important Points you as the property owner must keep in mind
- Check the credentials of the real estate developer. His earlier record and success in achieving targets.
- Before entering into a partnership agreement with a property builder, register your business and transfer the land to the book of this new entity. You can hold 100% of shares of this new entity or shares can be held by many promoters depending on their claim in the land. The new entity formed should ideally be registered as a private limited company under the company’s law act of India.
- Firstly, enter a partnership agreement with a real estate builder’s company. Hence, the agreement is between two companies. One giving land for the development of the project and other rendering capital and expertise to develop the project.
- How do you judge on profit sharing? In India, recent trends indicate a 1/3rd – 2/3rd rule. 1/3rd of the project outflows going to the owner of the land and 2/3rd of the project outflows going to the estate developer.
- As a landowner, ensure that the developed area of the project or the number of housing units is assigned to you and is clearly specified in the joint venture agreement. For instance, in case of a housing project, one should have the housing unit number, size and floor in the joint venture deal.
For example, a landowner enters into a joint venture agreement with an ABC property developer Pvt. Ltd. The plot/apartment of land measures 20 acres and about 600 housing units would be developed. While, a thumb of rule, 200 units should be allocated to the landowner and be remaining 400 to the property builder. For a landowner, this sort of agreement is safe and can result in better returns for his/her land as opposed to the deal wherein builder pays the 1/3rd of the cash inflows to the owner of the land on the sale of housing units.
Hire a professional legal company with expertise in real estate joint venture agreement, and due-diligence.