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Real Estate Joint Ventures: Understanding how they work

real estate joint ventures

Understanding how Real Estate Joint Ventures work

As more Kenyans seek ways of owning property, real estate joint ventures are becoming increasingly popular. Joint ventures are agreements between landowners and investors that aim at developing real estate property.

 Conveyance steps in real estate joint ventures

Here is an insight of the conveyance steps

Site Visit

First, the landowner takes the investor to the proposed site for the investor and his team to inspect it and establish the viability of undertaking a project on it. The factors they consider include the infrastructure, size and shape of the land, ground level, neighbourhood, area zoning and proximity to basic amenities.

These factors enable the investor to determine the most appropriate type of development for that particular parcel of land, that is, whether it is suitable for residential apartments, townhouses or perhaps even a commercial building.

At this stage, the investor might ask for a copy of the deed plan.

Investor makes a proposal

After visiting the site and coming up with a working concept of the nature of development to be undertaken, the investor makes a recommendation to the landowner, which in most cases consists of an offering a percentage of the built-up area to the land owner towards the cost of the land, and profits. This rate is arrived at after taking into account individual factors. Such include the cost of the land, the cost of construction, escalation in the cost of construction,  the cost of obtaining approvals for the project, legal, marketing and administrative expenses, and the selling price of the units in the project (cost- benefit analysis).

Landowners who do not want to get involved in the day-to-day running of the project, or to be responsible for any losses associated with the project, prefer this arrangement.  The landowner is free to dispose of the constructed property delivered to him/her under the joint development agreement, to retain his/her share of the built-up area, or to sell it at a later stage without the investor’s involvement. The remaining built areas, apartments or houses are allocated to the investor.

The proposal can also be in the form of returns and the profit-sharing ratio between the parties, depending on the agreed contribution by each side.

If the landowner accepts the investor’s proposal, they can start the formalities of drafting the main agreement, and the land owner avails copies of the title documents for verification by the investor’s advocate.

Drafting and Signing the contract

Once the investor’s advocate approves the title, the lawyer makes a draft copy of the joint development agreement, laying down the terms and conditions of the development and operation(s) therein, and presents it to the land owner for approval.

Usually, the landowner gets his/her advocate to look at it before approving it.

If everything is okay, the contract is signed by both parties, stamped, and in most cases registered under the Registration of Documents at the Ministry of Lands.

Incorporation of a joint venture company (JVC)

Once the joint venture agreement is signed, a special-purpose company is formed, with the singular aim of fulfilling the obligations and intent of the joint venture agreement. The new company formed should, ideally, be registered as a private limited company under the Companies Act under the Laws of Kenya.

Transfer of land to JVC

In line with the joint venture contract, the landowner avails to the investor’s advocate all deeds and relevant documents to facilitate the registration of the transfer of the land in favour of/ the name of the JVC.

Procurement of all approvals and commencement of project

By this time- the contractor and consultancy team for the project will have been formally appointed. The investor will have the plan prepared by the project architect, taking into account the land owner’s requirements, and when ready and approved by the landowner, the same will be submitted to the relevant government authorities for approval.

In most cases, the terms of the joint venture agreement stipulate that all the procedures, formalities and cost of approvals be catered for by the investor. Once the approval of the relevant bodies has been received, work can commence, and adverts placed indicating the availability of units in the project for sale.

Profit Sharing

On completion of the project, the built area/ houses allocated to the landowner are handed over to him/her. The owner is free to sell any of the houses assigned to him/her at any stage of the construction, or even after completion. The formula for sharing profits will have been negotiated and agreed upon before the signing of the agreement, which spells out the terms.

The benefits of real estate joint ventures arrangements

Access to expertise, more resources and finance

Many land/property owners with underused properties, or run-down buildings or undeveloped parcels of land have limited resources and, therefore, cannot develop them themselves. By entering into joint venture agreements with stronger, more established partners, such people can derive a lot more from their properties/land.

Critical intellectual real estate and technology are among the resources that are often difficult to build in-house. By entering into joint ventures with companies that have these resources, then landowners can get access to such assets.

In most instances, the investor has the technical expertise and finance that the landowner requires to develop, market and sell the project successfully. Therefore, coming together in such ventures affords each party access to the other party’s resources for free. Financial institutions are also more likely to fund a project in which a well-known company (investor) with a good track record is involved rather than one undertaken by a new entity. Landowners also benefit in that they do not pay interest on bank loans since, as joint venture partners, most investors will provide equity financing.

Access to larger markets and networks

Where a landowner in the real estate industry partners with an investor in the same field, they can reach a wider market than they would individually. This realisation is because they can combine and expand their sales forces and target market, resulting in larger, more diversified revenue channels.

Real Estate joint ventures often enable growth without the landowner having to inject additional funds or look for outside investors. The parties can see each other’s customer database to market the project and their properties and offer each other’s services and products to their existing clients. Joint venture partners can also benefit jointly buying what they need, research and development.

Room for flexibility

Typically,  real estate joint ventures are valid for the duration of the project. However, during its validity, the participating parties do not have to cede control of their businesses to the company they form an entity, nor do they have to stop ongoing operations. Every company can maintain its identity and return to regular business once the joint venture is complete.

Accessing previously inaccessible businesses

It is common for joint ventures to be between large organisations and much younger/smaller companies or individuals who own the land but do not operate in the real estate field. By collaborating with an established company, landowners not only gain from the expertise of these companies, but also increase their credibility in the eyes of the public and potential buyers.

Many land owners who are young or new entrants in the real estate business will ordinarily struggle to build market credibility required to form a stable customer base. Entering into a joint venture arrangement with a well-known brand helps establish credibility, enabling them to engage with big players in the real estate industry, which is hard to establish as an individual.

Expertise, experience and knowledge gain

For landowners who are new in the real estate sector, acquiring the skills and competencies necessary to operate in this market is time-consuming and costly. Partnering with established companies that have the relevant expertise required for entering target markets can allow such landowners to reduce the time it would otherwise take to develop the skill. During the execution of the joint venture, the land owners are exposed to the specialised expertise and knowledge by the investor and his team of experts and can learn from them.

Shared resources and responsibilities

Real estate Joint ventures also have the benefit of shared risk among the parties. Undertaking a new development as an individual landowner carries a huge of risk, which many people cannot bear alone. Under a joint venture arrangement, the parties pool resources, reducing the burden of getting finances and making the requisite technical expertise less of a challenge. The risk of the project failing and having an adverse impact on profitability is lower because the costs associated with the project are distributed between the parties. When a joint venture is successful, the parties share the profits as agreed. Similarly, when a joint venture fails, every party bears its portion of losses.

Save threatened property

There are instances where a landowner might wish to develop his/her land, and in addition to the lack of funds and required technical expertise, their property is also encumbered, e.g.,  by loans, unpaid lands rates, etc. Real Estate Joint Venture Arrangements have seen many such properties rescued from imminent auctioning by investors who come in and shoulder/unburden the property of the encumbrances.