To JV or not to JV – that is the question
Tue 08 Nov 2016
The number of joint venture projects in the house building industry has snowballed in the last few years and for every story of success, there are also – perhaps less well publicised - tales of woe. Ultimately, the potential benefits have kept them in vogue.
The term ‘joint venture’ is frequently heard, but many interested players have limited theoretical, strategic and practical experience. In addition, joint venture projects are naturally likely to be long term and lessons are still being learned even by those organisations who consider themselves experienced. This article seeks to demystify some of the complexities that surround JVs.
Why a JV?
Those who tread this path are usually driven by a variety of factors including:-
- Utilising the skills of other organisations. A joint venture often brings together partners whose expertise complements each other’s
- Access to funding. A project may be too large for one party to stomach and large housing associations often have better access to cheaper and more accessible sources of funding
- Access to opportunities, which might not otherwise be available
- The ability to carry out the constituent parts of the projects on an arm’s length basis. For example, debt funding, the build contract or the purchase of affordable housing may be provided by one or the other party on arms-length commercial terms. This enables each partner to ring-fence profit margins within certain parts of the project and keeps each partner’s contribution to the JV competitive;
- The potential for tax efficiencies of the joint venture vehicle;
- Gaining experience and building relationships. Sometimes a key driver is as simple as the parties wishing to gain more corporate experience of handling a joint venture and to explore whether their JV partner is somebody they wish to partner with in future;
Ultimately, the desire to share risk and reward is the seam that runs through most joint ventures.
Why not a JV?
With the sharing of risk come a number of counterbalances, which some organisations may not corporately be ready for, such as:-
- Loss or shared control over decision marking. Not only a ceding or sharing of autonomy, but most likely a slower and more cumbersome decision making process;
- The sharing of rewards and perhaps a lack of trust as to whether your partner is making additional profit margins at your expense;
- Becoming exposed to the financial strength of your JV partner;
- Too complex and expensive to justify. Ultimately, the work involved in setting up a joint venture project is significant and requires resources from many different parts of each party’s business. The legal and tax advice will be much more costly than on a standard site acquisition and ordinarily, it requires a fairly sizeable value of project to be worth the effort.
Most of the downsides are likely to be eroded over time as organisations become more experienced. In particular where partners have worked together before, there will be significant economies of scale when repeating the journey
Whilst certain trends have emerged, there is no ‘one size fits all’ structure. Some projects are joint venture in spirit but are really just a series of contractual arrangements, whereby parties give each other the opportunity to buy into parts of a project at a price. More full blown joint ventures will involve the creation of a new legal entity to carry out the project, which can be by way of partnerships, limited liability partnerships (LLPs) or limited companies. The most common corporate route is the LLP, which is often the most tax efficient vehicle.
The different functions of the joint venture each have their own quirks and complexities, but the main recurring themes include confirming:-
- the business plan
- the decision making process
- how the project is funded and by whom
- how profit is shared, and at what stages of the project
- How disagreements are settled
- How the parties might walk away, and the consequences of it happening
The full suite
Corporate joint ventures are typically document heavy – if a new entity is set up, it is likely to need a full suite of ancillary arrangements to hold it together and protect the interests of each partner. The likely suspects include:-
- Joint venture agreement:-
- Secretarial services agreement
- Sales services agreement
- Affordable housing agreement
- Build contract and/or project management agreement
- Agreed forms of consultant appointment;
- Collateral warranties to the JV and to the partners
- Loan agreements
- Inter-creditor deed
- Legal charges over the property to protect each funding party’s interest.
On top of the suite of documents, most joint ventures are created to take advantage of a project - specific opportunity, so there will most likely be an acquisition contract, and the rest of the suite of documents needs to be bespoke to the nature of the project in question.
A standard road map?
Unfortunately not. For the majority of cases, a joint venture is a bespoke arrangement for one project, however, the parties can agree to replicate the arrangements numerous times with minimal further negotiations. As a result, each joint venture requires bespoke attention, and with it comes a need for expertise, resources and coordinated project management.