A development joint venture is two or more parties putting different things into one scheme: land, money, expertise, or the ability to deliver it. The commercial logic is usually sound. The difficulty is that the structure has to answer questions about money and control before anyone knows how the scheme will go, which is why we look at it early in joint venture partnership work.
What follows is a general description of how these arrangements are commonly put together. It is not a recommendation of any structure and it is not legal or tax advice. Every joint venture should be documented by solicitors acting for each party separately, with tax advice taken on the structure before anything is signed.
The project company and why it is used
The common arrangement is a company set up for the scheme alone, with the parties holding shares in it. The company buys the site, enters the building contract, borrows if there is debt, and sells or lets the finished units. When the scheme is finished, the company is wound up or dormant.
The attraction is that everything belonging to the scheme sits in one place, which makes funding, accounting and eventual exit cleaner. Lenders are generally familiar with lending to a project company, often with security over the site and guarantees or support from the parties behind it.
Other structures exist: a partnership, a limited liability partnership, a contractual arrangement with no separate entity, or a land owner receiving a share of proceeds without becoming a shareholder at all. Which is appropriate depends on the parties, their tax positions and what the funder will accept, so the choice is one for your advisers rather than a default.
What each side actually contributes
The contributions are rarely symmetrical, and the documents have to describe them precisely. One party may contribute the site, at an agreed value. Another may contribute cash equity. Another may contribute the work of finding, designing and delivering the scheme, which is a real contribution but not a cash one.
Each needs a value and a timing. Land contributed at an agreed value is not the same as land sold to the company for cash. Cash contributed up front is not the same as cash promised when the facility is drawn. Work contributed should be defined as a scope with a fee or a profit share attached, so that it is clear what has been promised and what happens if it is not delivered.
The sequence of funding matters as much as the amounts. Where there is debt, the facility will usually set the order in which equity and debt go in, and that order determines when each partner’s cash is actually needed. We cover that mechanism in the equity and debt drawdown sequence.
How money comes back out
The usual order is that debt is repaid first, then capital contributions are returned, then whatever profit remains is split on the agreed basis. That split may be equal, may be weighted to reflect unequal contributions, or may step at defined return levels so that one party takes more of the upside once a threshold is passed.
Two details cause most of the later argument. Whether capital is returned before any profit is distributed, which protects the party who put cash in, and whether interest or a preferred return accrues on contributions in the meantime. Both need stating as mechanics with worked examples in the documents rather than as principles.
Timing needs the same treatment. On a scheme sold in units, money arrives over a period, and whether early receipts repay debt, return capital or sit in the company is a question the documents should answer before the first completion.
Who decides what
Day to day, someone has to run the scheme. Usually that is one party, with defined authority: instruct the design team, administer the contract, approve variations up to a limit, draw on the facility. Beyond that limit, decisions go to both parties.
The list of decisions needing joint consent is where the structure is really written. Typically it covers approving the budget and any revision to it, selling units below an agreed price, changing the specification materially, appointing or replacing the contractor, borrowing more, and anything outside the agreed business plan.
For that to function, both parties have to see the same numbers monthly, from the same source. A joint venture where one side prepares the figures and the other receives a summary is a joint venture heading for a disagreement, which is why the reporting format described in what a monthly investor report should tell you matters more here than anywhere else.
The overrun question, asked early
The question that decides whether a joint venture survives a difficult scheme is who funds a cost overrun. The available answers are that both parties contribute pro rata, that one party funds it as a loan to the company at an agreed rate, that the non-contributing party’s share is diluted on a stated formula, or that the scheme is sold.
Any of those can be reasonable. What is not reasonable is leaving it undecided, because the discussion then happens at the worst possible moment, with a contractor waiting to be paid and a lender asking questions. The mechanism should be written down, with the formula worked through on an example.
The same applies to a scheme that stalls. A deadlock provision, an exit route for a party who wants out, and a method for valuing a share are all easier to agree before the money is at risk. We go through those points in what a JV shareholders’ agreement should cover.
What makes the cost side work
A joint venture needs a single set of numbers that both parties accept, maintained by someone whose role is to be accurate rather than to be optimistic. In practice that means an independently prepared cost plan at the start, a monthly measured valuation during the build, and a forecast final cost that both sides read at the same time.
It also helps if the delivery party is not the only party with cost information. That is not a question of trust, it is a question of structure: the partner who is not running the site has no other way to test what they are being told. The ordinary mechanisms are client side quantity surveying and the monthly discipline of delivery and cost control, run as part of development management.
This article is general information, not financial, investment or legal advice.
Setting up a joint venture on a scheme?
We prepare the cost information both sides will rely on, and report it monthly to both in the same format.