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Joint Ventures For Real Estate


What is a Joint Venture?

When two (or more) people decide to purchase real estate together for investment they call themselves partners.

Partnerships are easily formed because nothing needs to be put down on paper. There is just one problem, which that unless there is clear agreement upon contributions, profit (or loss) share and liability, there is potential for a messy dispute if the partnership breaks up with accusations flying in all directions.

Disputes are reduced when partners put down their agreement on paper. If they do, and follow a few simple rules on what to put down, they may change their relationship to become joint ventures instead of partners, and avoid many of the perils of partnership.

At law, a joint venture stands on its own as a legal relationship.

As Justice Kirby said in the Bridge Oil Case:
... A joint venture is a particular and increasingly familiar form of relationship between business parties, corporations or individuals … the main features of [such joint ventures] are typically defined in a written agreement [where] the parties … contemplate a harmonious and cooperative relationship of mutual advantage...

A joint venture is put into writing and is called a Joint Venture Agreement (“JVA”).

Because the joint venture is similar to a partnership or agency, the JVA will specifically exclude the joint venture from being treated as a partnership agreement or an agency agreement.

  • A joint venture is not a partnership because liability is limited in the joint venture agreement - one joint venturer cannot make the other joint venturer liable for debts that they incur in the name of the joint venture, unless authorised under the joint venture agreement.
  • A joint venture is not an agency because one joint venturer does not do the work in return for payment of a fee or commission payment by the other. They are joint venturers together, each contributing and each being remunerated in the form of a profit share.


What must be agreed for a Joint Venture Agreement
for a real estate project?


The High Court of Australia has described the elements of a joint venture as follows:

The term "joint venture" is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill.

United Dominions Corporation Ltd v Brian Pty Ltd
(1985) 157 CLR 1

These four elements must be agreed when a joint venture for a real estate project is formed between a property investor or property owner, and a joint venturer:

  1. The joint venture project – The project can be to purchase and either renovate or develop or quickly sell a property for a profit. If the property is to be purchased for re-sale, it is called an Investors Joint Venture. If the property is already owned, it is called an Owners Joint Venture.
  2. The contributions and responsibilities – The contributions and responsibilities can be financial in the form of cash or borrowings, and can be management in the form of skills. Different contributions can be made, or equally made by the joint venturers. The financial contributions are repaid before the final profits are distributed.
  3. The profit shares and distributions – The profits in the project can be up front. Ongoing (cashflow) during the venture, and at the end of the project, when the property is sold. The profits are distributed when they arise during and at the end of the joint venture.
  4. The termination – The project is to continue until the purchaser pays out the sale contract, and therefore the project terminates. The project can be terminated early if a joint venturer fails to make their agreed contributions, or if the project fails for some reason.

The Joint Venture Agreement that is prepared is signed by the joint venturers as individuals or in their company or family trust.

If the joint venture involves the purchase of a development property, then usually a joint venture company will be formed and the Joint Venture Agreement will be prepared as a shareholder’s agreement to set out how that company’s affairs are to be conducted. If so, the joint venture is called an incorporated joint venture.

A short form of Joint Venture Agreement is called a Heads of Agreement (an “HOA”), meaning that it can lead to a longer and more formal agreement, if desired. If not, an HOA JVA can suffice as the concluded agreement, provided it is signed.


Why are Joint Ventures for sale of real estate using
vendor finance strategies popular?


A vendor finance strategy is a strategy used for the sale of a property at best profit where the seller agrees to receive a full price over time, and where the buyer agrees to pay that price because they are given the time they need to organise payment of the price.
Specifically,

The seller benefits – by receiving a full price for a property over time, and in the meantime, by receiving payments which are sufficient to cover the loan payments, rates and insurance. The seller is also able to sell the house more readily, by appealing to buyers who are unable or unwilling to obtain bank finance at the time, but who wish to take the first steps to home ownership.

The tenant/buyer benefits – by being given the opportunity to build up a deposit for the purchase of a house at a pre-agreed price. In addition, the regularity of the payments builds up the tenant/buyer’s creditworthiness, which will assist in obtaining bank finance. The tenant /buyer is able to improve the property and keep for themselves the increase in value obtained.


How does an Investors Joint Venture work?

An Investors Joint Venture which is formed to carry out a project to sell a property using a vendor finance strategy usually consists of a combination of a property investor who provides the funds and a joint venturer who provides the skills to sell with a vendor finance strategy.

Specifically, the Investors Joint Venture Agreement will be along these lines -

The Joint Venture Project

  • The project is the purchase of a property for resale using a vendor finance strategy.

The Contributions and Responsibilities

  • The property investor contributes the funds to purchase a property in their own name as their contribution to the joint venture – the funds are a mixture of cash and borrowings. The title to the property is solely in the name of the property investor.
  • The joint venturer contributes their skills to the joint venture by selecting a property to purchase and then selling the property using a vendor finance strategy to sell at best profit. The joint venturer is responsible for the management of the vendor finance arrangement.

The Profit Shares and Distributions

  • The property owner and the joint venturer are both rewarded for their contributions, in the form of a profit share.
  • The profit to be shared is calculated after repayment of the funds contributed by the property investor. The profit is usually shared equally between the property investor and the joint venturer.
  • This profit share arrangement sets the joint venture apart from sales agency agreements that real estate agents use for the sale of a property because the emphasis is the sale of the property at best profit, not simply the sale of a property at the best price a cash buyer is prepared to offer.

The Termination

If the project is the purchase and sale of a single property, then the joint venture will terminate on completion of the distribution of the profit share following the sale of the property.

Otherwise, the joint venture may be terminated if no property is purchased for the joint venture project, or if the investor or joint venturer fails to make the contributions promised.

How does an Owners Joint Venture work?

An Owners Joint Venture is formed to carry out a project to sell an existing owned property using a vendor finance strategy. This saves the time and trouble of sourcing a property and funding the purchase of the property.

Why would a Property Owner want to enter into a joint venturer with someone who has vendor finance skills? The main reason is that the Property Owner no longer wishes to stay in the property, and needs to move on quickly because - they have a new job a long way away, or cannot sell the property for the money they want or for enough to pay out the mortgage, or have lost their job and cannot afford to make the payments on the mortgage any longer.

Specifically, the Owners Joint Venture works along these lines -

The Joint Venture Project

  • The project is that the joint venturer looks after the property, particularly the payments on the mortgage, the rates, and so forth, until a sale is completed.

The Contributions and responsibilities

  • The property owner is responsible to contribute the property at an agreed value, which must be greater than the mortgage amount. The title to the property remains in the name of the property owner. When the time comes for the sale to be completed, there must be sufficient funds to pay out the mortgage.
  • The joint venturer contributes their skills to the joint venture by taking over the responsibility of paying the mortgage, the outgoings and looking after the property. The joint venturer derives the cash to do so by selling the property using a vendor finance strategy to fund the payments required.

The Profit Shares and distributions

  • The property owner and the joint venturer are both rewarded for their contributions. The profit share can take one of these three forms:

    (i) The property owner accepts the agreed value on completion of the sale of the property.

    (ii) The property owner and the joint venturer share the profits, in the same way as they share profits under an Investors Joint Venture.

    (iii) The property owner may be given the right to terminate the joint venture after a vendor finance sale is in place, upon payment of an agreed amount as compensation.

The Termination

  • The joint venture will terminate on completion of the distribution of the profit share following the sale of the property, unless the owner is given the right to pay out the agreement earlier.
  • The joint venture may be terminated if no vendor finance sale is entered into within a specified time.


Are you interested in finding out more?

Contact me using the ‘Contact us!’ tab on this website, and more information will be provided on –

  • How Cordato Partners can help you more with Joint Ventures for real estate
  • Suggestions on how to find joint venture partners to buy with and to sell with in the part of Australia and New Zealand where you would like to invest, or have your property to sell.

 

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