A real estate joint venture (JV) is a legal arrangement between two or more parties to work together and combine resources to develop a real estate project. Most of the projects are financed and developed as a result of real estate joint ventures.
JVs allow real estate managers (individuals/entities with experience and expertise in managing real estate projects) to work with real estate capital providers (entities/individuals that can supply capital (land/cash) for a real estate project)
Note: We will be explaining further with respect to a land owner, an individual with land as his capital (asset) and a real estate builder/developer as a real estate manager, putting expertise and experience. We are not considering any investment banker, putting capital as cash.
A joint venture benefits both the land owner and the real estate manager
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A real estate joint venture typically involves a relatively 50/50* or 60/40* equity split between JV parties (* It is again negotiable between parties)
A JV in real estate benefits both the land owner and the real estate manager. It allows the land owner to have greater control over key and strategic decisions relating to the project while tapping into the expertise of a real estate manager with specialist knowledge in running real estate portfolios.
Equally importantly, an equity stake gives the real estate manager sufficient ‘skin in the game’ to have a keen interest in maximizing project returns and making sure the property is being managed in the best possible way.
Table of Contents
Structuring a Real Estate JV
The real estate manager’s expertise, combined with the land owner’s
asset, allows both parties to maximize their respective returns and earn a greater share of the returns
A real estate joint venture will involve a land owner who contributes the vast majority of the capital as his land and a real estate manager who invests the initial funds required to start off the project.
The ‘Land owner asset’ will typically be structured as a limited partnership or legal entity (Special Purpose Vehicle) between the land owner and real estate manager.
The SPV entity will then enter into a Joint Development Agreement with the real estate manager, either directly or via a subsidiary, and thereafter into a property management agreement (PMA), often with a third-party property manager (contractor/s).
Types of Real Estate Joint Ventures
The best
joint venture is defined as the ideal match of cash flow requirement and level of risk appetite
In real estate, there are various prominent ways of getting into a joint venture, and the best joint venture is defined by the ideal match of cash flow requirement and level of risk appetite between both parties.
Now, we will be explaining different joint ventures in detail with easy to understand examples;
1. Profit Share
The Profit share model has been designed to ensure the LO gets an opportunity to benefit from the upside of the project with lower risk exposure and also creates a strong alignment of interest between RBD and the LO. In this model, the RBD executes the entire project with its expertise in a collaborative manner with the LO.
The key highlights of this model are:
- The projected surplus ( excluding land cost) is distributed between LO and RBD in the pre-negotiated ratio
- As RBD and the LO are sharing the project margins, the alignment of interests of both parties is very high.
- The RBD will manage all day-to-day activities and operations with regular updates to the LO.
- As this model is very collaborative, the LO can choose/decide his level of involvement to be a part of the entire project development process.
PROFIT SHARE MODEL EXAMPLE (Total Saleable Area – 1 Mn (Million) sqft & 50:50 profit share ratio)
2. Area Share
The Area share model has been designed for LOs who can sell their own inventory/floor space generated out of the project designed and constructed by the RBD, the LO has higher probability of enjoying the upside by delaying sales of the units/floor space allotted to him. In this model, RBD will construct and develop all the units/floor space of the project while separating the units/floor space held by the LO and the units/floor space to be sold by the RBD. After the construction, RBD will hand over those units/floor space to land owner free of cost and land owner can make his realization by selling his share of units/floor space.
- The key highlights of this model are:
- RBD may pay some amount of refundable / non-refundable amount upfront to the LO to improve his(LO) early cash flows
AREA SHARE EXAMPLE (Total Saleable Area – 1 Mn sqft & 75:25 Area share ratio)
Also, learn how to evaluate your land.
3. Revenue Share
The Revenue share model has been designed for LOs who can enjoy steady income out of the project during the sales stage. In this model, RBD will construct, sell and develop all the units/floor space of the project and the fixed percentage collections from customers is transferred to the LO during the lifecycle of the project.
The key highlights of this model are:
Project Revenue * Revenue share ratio of LO = LO realization
- The developer may pay some amount of refundable / non-refundable amount upfront to the LO to improve his(LO) early cash flows
REVENUE SHARE MODEL EXAMPLE (Total Saleable Area – 1 Mn sqft & 78:22 profit share ratio)
Related read: How to make succeful land transaction?
4. DM (Development Management) Model
The DM model has been designed to extend RBD expertise and brand in real estate development to LOs. In this model, RBD will execute the entire project with its expertise in a collaborative manner with the LO. All the costs and expenses of the project will be borne by the LO, RBD will only facilitate all the operational activities of the project including sales and construction.
- The key highlights of this model are:
- Developer will only charge a DM fee as a percentage of the revenue from the project
DM MODEL EXAMPLE (Total Saleable Area – 1 Mn sqft & 15% DM Fees)
