What is a Joint Venture | Explained

Joint Venture

Joint Development Properties or Joint Venture in Property Development

joint-venture

In the real estate market, many of us would have heard of Joint development properties or joint ventures. But I am sure that many of them have a lot of confusion related to the topic. Today in the post below, I will mention some of the important points related to the joint venture or the joint development properties.

What is a Joint Venture?

A joint venture is a business that is formed when two businesses join forces and use their diverse skill sets to achieve a shared commercial goal.

Joint Venture In Property Development
A joint venture is a temporary but formalized cooperation of builders, finance companies, and developers who contract with each other for a specific development project, such as a housing estate, generally by forming a temporary subsidiary business.

Joint Venture is a common word, used in any business, which is an agreement between any two bodies, whereas, joint Development agreement, is a term only specified to Real estate Development. A Joint Development Agreement, on the other hand, does not involve any business sharing. Instead, it is defined as making a contribution to a company. The real estate project could be in the form of an Industrial Township, a Commercial Complex, a Residential Township, or a Group Housing Society, among other things. A real estate project often takes several years to design and complete. The paradigm of joint development arrangement has arisen as a common model for real estate development, in which a landowner and a developer pool their resources and efforts.

Agreement

In a typical joint development agreement, the landowner provides his land and enters into a contract with the developer to develop and build a real estate project at the developer’s expense. As a result, the landowner contributes land, while the developer bears the expense of development and building. Depending on the terms and conditions agreed upon, the landowner may receive compensation in the form of a flat sum payment, a percentage of sales revenue, or a specified proportion of the project’s constructed area. In this way, the landowner and developer’s resources and efforts are combined to produce the most productive result possible. The cost of land in a real estate project accounts for a significant portion of the entire project cost. In such an arrangement, the developer is relieved of the need to spend on land acquisition at the outset, allowing him to focus on project development with limited resources in a more efficient manner.

On the other side, a landowner who may lack the necessary skills and expertise to build the project receives a higher price for his land than he would have received if he sold it outright. As a result, the joint venture development utilizes the resources from both sources and produces the outcome. In fact, it can be said that the joint development arrangement is a commercial arrangement of convenience.

Different Types of Joint Development Agreement

Different types of cooperative development arrangements have evolved over time as the real estate business has grown. The rise in land prices has also aided the emergence of cooperative development agreements for the development of real estate. Various types of cooperative development agreements that are seen in practice include the following.

  • The owner of an old house may be tempted to modernize the property by adding more floor space, including a basement and stilt area, which may have been permitted by regulatory authorities. In this situation, the owner gives the house to the developer for construction, and the floors built are shared by both parties. In some cases, the developer may also provide monetary compensation and an alternative residence for the owner to live in during the construction time. This type of structure is mostly observed in Tier-one cities.
  • The creation of large real estate projects, such as residential or commercial complexes, necessitates a significant investment. The developer may not be able to invest in the acquisition of land for the project’s development. As a result, cooperative development agreements have evolved for the development of significant real estate projects. In this situation, the landowner gives his land, while the developer takes care of the development, and the developer pays the landowner a consideration for his contribution to the project’s development. In such circumstances, the consideration is given not only in monetary terms but also by sharing developed units in the project according to the terms agreed upon.

How to structure the Joint Venture Property agreement?

A typical collaborative development agreement is typically constructed to include a number of financial components, which are outlined below.

  1. Contribution– The pooling of respective resources by the landowner and the real estate developer is known as a joint development arrangement, which can be shown as — Mr A owns a piece of property that might be converted into a residential or commercial real estate project, but he lacks the necessary knowledge and expertise in project development and marketing. Mr A works with Mr B who, while lacking the financial resources to spend in land acquisition, which accounts for a significant portion of the project’s overall cost, does have experience, skill, and a reputation for project development and marketing. They get into agreements to collaborate and contribute their respective resources.
  2. Cost – For the development of a real estate project, costs must be incurred for obtaining various regulatory approvals, such as change of land use, payment of external and internal development charges, real estate construction costs, marketing costs, brokerage/commission to the agents for the sale of the project, and financial costs, among others. In most joint development agreements, the developer bears all of these expenditures. However, there is no hard and fast rule to this concept, and some of the aforementioned costs may be borne or shared by the landowner as well, depending on the mutual terms agreed upon by the parties.
  3. Power of Attorney– There is normally no transfer of title from the landowner to the developer in a joint development agreement. Rather, the land is given to the developer for the purpose of real estate development by the owner. As a result, the developer’s title to the land is rarely transferred to him. The landowner executes a power of attorney in favor of the developer, transferring all development rights to the developer, including the right of representation and getting approval from various regulatory agencies, and hands over control of the land for development and construction. Furthermore, the landowner executes a power of attorney in favor of the developer or his nominee for the marketing and sale of the project’s developed units. The developer gets the right to transfer the ownership/title deed of the developed unit, including the undivided portion of the land attached to the developed unit, without acquiring the title of the land transferred in its name by way of execution of the conveyance deed, which is a unique situation in joint development agreements. According to section 53A of the Transfer of Property Act, 1882, the developer owns the land in most cases.
  4. Marketing– The developer is usually granted rights by the landowner to sell the project and collect the sale money from buyers. The developer finances the project and pays the landowner the consideration by pre-launching it, entering into agreements with buyers for the constructed units in the project, and obtaining an advance and subsequent construction-linked payment from the customers. In some situations, the parties may agree to keep the sale proceeds in a joint account, which they will share in the agreed-upon ratio.
  5. Handing Over– The landowner grants the developer a right in the nature of a license to enter the plot of land for the purpose of development in a joint development agreement. The essence of the joint development agreement is the transfer of land ownership for the purpose of performing project construction and development. Furthermore, in most situations, the property is supplied not only for the development of the project but also for all other purposes, such as selling the project’s developed units to customers and transferring the ownership rights of the developed units to customers.

Revenue Sharing– The landowner may get the sale consideration for the land in a variety of ways, depending on the parameters agreed upon by both parties, such as:

At the start, there is a refundable/non-refundable security/advance money.

At certain phases, a lump sum amount of money will be received.
According to a mutually agreed-upon ratio, a portion of the sale money is shared.
According to a mutually agreed-upon ratio, constructed/developed land will be shared.

Termination of agreement– There may be several stipulations agreed upon by the parties regarding the project’s fate and the payment/repayment of further consideration or compensation in the event of a breakdown or termination of the agreement.

Well now, this is just brief info regarding the joint venture development of properties. If you are planning to develop any property in a joint venture, it is always advisable to take expert advice.

At Coldwell Banker Value Add Realty, we have enquiries for Joint Development looking for owners who have parcels of land and want to consider Joint Development. Please feel free to contact the below mentioned person for queries.

Name: Govindraj MV- Real Estate Specialist ([email protected])

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Frequently Asked Questions

1. Should the joint venture agreement be registered?

Ans. Yes

2. Who pays the GST in joint venture Development?

Ans. Landlords and developers should obtain single GST registration on the basis of Joint Development Agreement, as AOP i.e. as Association or Body of Individuals. Both of them pays the GST

3. Is Joint Venture Property Development good for Investment?

Ans. Yes, JV is always a great investment commitment

 

Last Updated on July 5, 2022 by Maansa Parameswaran

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