What is a joint venture between a landowner and a real estate developer?
Joint ventures are formed by at least two parties with the objective of achieving a specific investment return. Unlike many other business agreements, when the objective is achieved, the joint venture is usually terminated. Following are the attributes of a joint venture. Risk sharing: A single investor may be unwilling to undertake a real estate venture because of its size, location, capital requirements, and/or duration. However, by sharing the risk, two or more parties may be willing to undertake the venture.
Combining expertise with capital: Joint ventures are frequently formed as a way to pool equity capital from one or more sources, as well as a means of bringing parties with different expertise to the venture. A joint venture could also involve purchasing existing properties and operating them. In this case, one of the parties may be responsible for acquisition, leasing, and management, and others may provide capital.
Participants in joint ventures may include any combination of individual investors, partnerships, corporations, or trusts. However, a joint venture in and of itself is not a legal form of organization. In order to specify capital contributions, rights, duties, profit sharing, and the like, a joint venture agreement or a business entity must be created. The choice of organizational form used to accommodate those various groups of investors could be a partnership, corporation, Pvt. Ltd, or trust. Partnerships are frequently the vehicle of choice in real estate joint venture.
Because the parties to a joint venture may contribute different things, and possibly in different proportions, a partnership must be structured such that it provides economic incentives for all parties. Differences in tax status of investors also may affect the way partnerships are structured. A joint venture can take on a number of different partnership forms. The most common is the limited partnership. As is the case with all partnerships, there must be at least one general partner and any number of limited partners. Generally, in real estate, limited partners are the investors that provide most of the equity capital, while general partners are usually responsible for managing the partnership assets and may contribute a relatively small portion of the required equity capital.
Following factors are considered by potential investors for structuring a joint venture.
Points you as the owner of the land must keep in mind:
Check the credentials of the developer. His past record and success in achieving targets. Before entering into a joint venture agreement with a builder, register your company and transfer the land on the book of this new entity. You can hold 100% of shares of this new entity or shares can be held by various promoters depending on their claim in the land. The new entity formed should ideally be registered as private limited company under the company’s law act of India. Now, enter a joint venture agreement with a builder’s company. Therefore, the agreement is between two companies. One providing land for the development of the project and other providing capital and expertise to develop the project. How do you decide on profit sharing? Well, we have defined it above. However, Recent trends in India indicates a 1/3rd – 2/3rd rule. 1/3rd of the project outflows going to the landowner and 2/3rd of the project outflows going to the real estate developer.
As a landowner, make sure that the number of housing units or the developed area of the project is assigned to you and is clearly mentioned in the joint venture agreement. For example, in case of housing project, you should have the housing unit number, size, and floor in the joint venture agreement. As an example, a landowner enters into a joint venture agreement with a ABC real estate developer Pvt. Ltd. The plot of land measures 20 acres and about 600 housing units would be developed. As a thumb of rule, 200 units should be assigned to landowner and remaining 400 to the builder. For a landowner, this kind of agreement is safe and can result better returns for his/her land as opposed to the agreement wherein builder pays the 1/3rd of the cash inflows to the landowner on the sale of housing units.
Hire a professional legal company with expertise in real estate joint agreements, and due-diligence.
Are You A Property/Land Owner?
Promote your property with Joint Venture
Conserve your heritage
Joint development enables you to retain your lineage and leave behind a more convenient and manageable piece of wealth for your next generation.
Address your family’s needs
A large family has varying needs - Brother A wishes to en-cash his asset, Brother B wants to retain space and Sister C wants to divide her inheritance between several heirs. In essence, each individual is aspiring independent ownership.
Joint development can meet all the varied needs.
Advantages of Joint Venture Development
Ensuring appreciation in value
A decision to sell off your property is essentially a decision to cut off the possibility of earning because of land appreciation. Land is a finite resource and in the long run will always appreciate. Hence, the value of your share of shop /office/flat will also appreciate.
Tax benefits for re-investment
Any investment, of the land consideration in retained built space, is exempted from Capital Gains Tax. As against this, outright sale would attract capital gains tax.
Save on Stamp Duty
You save 9% on Stamp and Registration charge in opting to retain flats / offices / shops, since you already own the land. Whereas, if you choose to buy similar property elsewhere it would attract payment of stamp duty amounting to additional 9%.
Keeping your convenience in mind
We will construct the flats/offices/shops to suit your convenience and requirements. We will create an exceptional building with the current best practices and highest specifications, which will make you the proud owner of a branded, landmark building in Chennai.
Creating opportunities for lucrative returns:
Our alliance would bring together your land equity and our brand equity, which in turn will ensure you a premium value for your built-up area as compare to the prevailing market prices.
Chennai’s landowners are sitting pretty as they are now offered an alternate option for joint venture development. It is not the property developers who are innovating this model but a consortium of funds from Japan and Singapore who are offering a new model of residential property development in India across select cities. The development model provides a comprehensive range of services to landowners. These include funding, development including architecture and approvals, and marketing services. For landowners who are not accustomed to the intricacies of real estate development or financial implications on the development, this option is said to provide an assurance that professionally managed services would be made available.
In what way will this model have an edge over the joint venture development? Under this option, funders will bring with them not just the required expertise to carry out residential development, but additional services like construction finance, architectural expertise, project management team and project marketing. Landowners will just need to oversee the series of developments taking place to transform their raw lands into productive assets.
Joint development projects must be monitored carefully so that homeowners get the best deal
As property gets increasingly scarce in prime city areas, older homes are increasingly in demand by developers. One of the most common alternatives to an outright sale is the joint venture development. Builders enter into an agreement with landowners where the latter retain ownership of the plot and the builders demolish the existing structure, erect an apartment building in its place, and offer a few apartments or flats as compensation to the owner. For example, assuming the plot size is 5,000 sq. ft with a market value of Rs. 2.5 crore. The builder who intends to develop the plot and convert it into an apartment building could offer to develop a four-storied building consisting of 16 individual flats, of which he would offer four flats to the owners along with some cash consideration. The number of apartments offered to the landowner as part of compensation would be based on factors such as prevailing cost of the land, construction cost and other related expenses required to demolish the old house and complete the new project. Often, apart from apartments, a portion of the total cost is given as cash. Usually, the ratio will be 70:30, where the flats are worth 70 per cent of the total cost and the rest is given as cash (but not necessarily hard cash). In some cases, while the plot is being developed, the landowners are accommodated in another house. In this case, the rent and other costs are borne by the builders until the flats are fully ready to be handed over for occupancy.
Determining the right price
Arriving at a right deal takes time as there are various things to be taken into consideration. Broadly we can classify as below
While its clear that to achieve a return of 4 crores from your property, you have to do considerable investment of 1 crore and also work towards achieving it.
Joint Venture comes into play when the owners are not able do the construction themselves. So striking the deal midway will be a win – win situation.
In the above example, if you are thinking of outright sale, you can aim at anything above land’s market price of 3 crores ( 3.5 – 4 crores ) or evaluate JV options which can net you around 4 crore rupees. Points to note : 1. 8 FSI is achievable but will come with deviation. Please note that CMDA never approves projects with deviation. It is usual for builders to increase the FSI from approved FSI (1.3 to 1.5). Banks usually provide loan, provided the deviation is within their acceptable levels. Banks will never approve loans for flats which are not in plan i.e if the approval is for 6 flats and builders adds the 2 more, banks will not provide loan for such cases. Always evaluate multiple quotes from different builders before inking the deal. India is witnessing a major boom in the real estate sector in most of the metropolitan cities. This has given rise to a number of joint venture agreements being signed between real estate developers and land owners. Land owners who have mostly inherited their properties have no insight into the legalities involved. They get into joint venture agreements based on faith, relying on the words of real estate developers and many a times find themselves in trouble. There are numerous instances of land owners being left in the lurch after entering into joint venture agreements. Their lands are locked for many years with no signs of the proposed development projects taking off. Land owners can neither sell their lands to other prospective buyers nor get into new joint venture agreements. This article highlights tips which land owners can make use of to safeguard themselves before getting into a joint venture with real estate developers.
Let us begin by understanding what a joint venture is and its related terms.
A Joint venture is an association between two or more participants for a specific business purpose and for a limited duration. A joint venture comes to an end once the business purpose is achieved. A joint venture is characterized by risk sharing, combining capital and expertise of the involved parties and speculative objectives. A joint venture can be organized as a partnership firm, a corporation or any other form of business organization which the participants deem fit. A real estate joint venture is mostly organized as a limited partnership where limited partners are the ones who provide most of the equity capital. General partners are responsible for managing the assets while contributing a small portion of equity capital.
A joint venture is not a legal form of organization and hence a joint venture agreement needs to be created. A joint venture agreement includes details of construction, profit sharing in percentage, and time-frame. The land owner usually provides his land and provides no further investment. All other aspects of construction, investment and obtaining the required approvals is the responsibility of the real estate developer. Profit is shared such that it benefits all participants.
Factors to be reviewed while drafting a joint venture agreement
Capital Contribution: The capital to be contributed by all participants should be clearly specified. The agreement should specify the initial capital contributions to be made by all and how future capital contributions will be done.
Share in cash flows: There are two types of cash flows. One being annual cash flow obtained by operating the property and the other being cash flow received from sale of property. The participants' share in both these types of cash flows needs to be specified.
Preferred Return: The type of cash flow to be used for paying the preferred return to the participants needs to be mentioned, if required.
Profit Sharing and risk sharing: Participants must share the profits and losses in proportion to their ownership interests. Proportion of sharing taxable income (or losses) and capital gain (or loss) may also be based on the proportion of distribution of annual cash flow. All participants must share the financial, legal and operational risks in proportion to their ownership interests. If risk is shared by all the participants, impact of risk on individual participants is reduced.
Management and control: Participants who control the property's operation must be specified. Participants who will be involved in management decisions related to capital, leasing, financing and sale of property needs to be specified.
Tips for land owners while getting into a real estate joint venture agreement
Property joint venture agreements are the next best bet to developing on your own these days, what with the prices of everything soaring higher than ever! By way of a joint venture, a developer may not necessarily purchase or own the land every time he develops and constructs a new project. Likewise, a person owning land may not have sufficient funds and expertise to develop a certain property. In this case, the two can conveniently join hands by way of a joint venture agreement, to develop a particular property and share the profits mutually, in the best interests of both, the landowner and the developer. Make note, joint venture agreements are perfectly valid and enforceable in the court of law. Says Jayant Hemdev of Hemdev Associates, "Joint development is very beneficial from the developer's perspective as they do not have to make any outright purchase to acquire the property of choice. Generally landowners tend to retain a portion of the property to be developed as payment for usage of land. Buyers only look for location and reputation of the developer, and if both are good, they go ahead with the purchase."While the whole idea might seem simple, meticulous effort is required for drawing a joint venture agreement. Because any dispute arising between the builder and the owner is going to be resolved purely only on the basis of this agreement. As per the law, a joint venture agreement is in the nature of a partnership agreement and the partnership is automatically dissolved upon the completion of the project as per the terms of the agreement.
Since a joint venture agreement is essentially a partnership and creates a charge and interest of the developer in the property of the owner, registration of the joint venture agreement can be done. However as a general practice, joint venture agreements are normally not registered and the developer only gets to have a Power of Attorney to enter into a sale agreement with the buyer for the purpose of transfer of the undivided share of the land (UDS). It's also because of the fact that most developers find it difficult to reveal the real and actual consideration of the venture and are anxious to develop the land within a short period, make quick returns and move on. Serious problems can arise if an unregistered joint venture agreement becomes the bone of contention between the landowner and the developer. Similarly, there could be issues relating to the Open Space Reservation (OSR) land and other common amenities that are shared by the occupants of the building, if there is an underlying defect in the joint venture agreement on such issues. Therefore, it is highly recommended to have the joint venture agreement registered for the satisfaction of all the parties concerned. The stamp duty payable for registration of the joint venture agreement would be equivalent to the stamp duty payable on any ordinary agreement; in Tamil Nadu it is 1 percent, provided there is no underlying sale of UDS to the developer from the landlord. It must be understood that as per the law, the developer is deemed to have only temporary possession of the land for undertaking the construction work by them and the absolute ownership of the land would still vest with the landlord.
Enforceability of a joint venture agreement
With the implementation of the Consumer Protection Act, 1986, there exists parallel machinery for adjudication of disputes where sale of services or goods is involved. The Consumer Protection Act provides for a speedier remedy and without payment of the exorbitant court fees, which one has to pay while filing a suit for specific performance in the civil courts. Under the Special Relief Act, 1963, a substantial relief is granted to the owner of the land, if the builder in the joint venture agreement fails to complete the construction within the stipulated time or does not give possession once the construction is finished. This is applicable even if the construction is defective or sub-standard construction material has been used in the construction. In addition, where substantial amenities like water and electricity are not provided, the builder is required to compensate the owner. However, the Consumer Court does not offer a panacea against all disputes in connection with the joint venture agreement. Wherever complicated, and the question of law and the fact are involved, the complainant is required to knock on the doors of the city civil court.
If for any reason, the developer is not coming forward to become a party to the agreement for sale, then at least the developer should be one of the attesting witnesses. Likewise, similar precautions should be taken while executing and getting the registered sale deed of the property in due course.
Measures to avoid disputes in Joint Venture agreement
According to advocate, Sai Srujan Tayi, disputes in relation to a joint venture(JV) may arise at the behest of the land owner or the developer. While, most of these disputes revolve around questions such as valid execution of the agreement, breach of the agreement, consequences for breach, etc., when disputes do arise, parties tend to make an issue of every aspect of the agreement with an intent to frustrate the rights of the other. "Depending on the nature of the agreement, sufficient safeguards are required to be incorporated in respect of crucial aspects of the agreement at the stage of its drafting itself for the purpose of avoiding disputes in the future. For example some crucial aspects to consider are – Necessity for registering the agreement, Time for performance of obligations, Nature of rights conferred and Dispute resolution options among others," he emphasises.Joint ventures have become an inevitable part of the real estate industry and would continue to be so in the future. Hence it's prudent to be aware of the intricacies of such arrangements to ensure the interests of the ultimate buyer or customer is safeguarded.
With finance getting tougher, Joint Ventures is one of the best strategies to bypass personal finance and continue to build a property empire
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(A land worth Rs. 10 lakhs gets converted to flat of Rs. 15 lakhs)
This is better option than selling the land where the take home is less than the value of land).
From the calculation cited above, it is evident that when we develop the property instead of selling, our returns are most of the times more than 100 percent higher. It is therefore, always advisable never to sell a property but instead get it developed by a reputed developer having an impeacable track record after making a thorough background and performance searched and after satisfying ourselves about his capabilities, performance and track record.