Whether you like it or not, in real estate, your resources are limited. It could be financial, land, experience, or the technical and professional inputs that go into the development of landed property. And it is this missing piece of the jigsaw (as it applies to your case) that necessitates joint venture.
WHAT IS JOINT VENTURE (or Synergy, in plain language)?
Joint venture (also known as JV) is a strategic alliance in which different parties draw their resources together to compliment one another in order to achieve more than would have been achieved singly.
As evident in real estate, especially in commercial property development, it takes more than land to build; hence the need for combined effort towards success in real estate.
WHO SHOULD CONSIDER JOINT VENTURE?
JV is the way to go for any intending investor that is limited with one resource or the other. The essence is to find and partner with (within a clearly structured agreement) whoever can compliment the areas where you are lacking. You should consider joint venture if:
- You have the land but no funds to develop it. In this case, as a land owner, you have probably stalled and held on to your land for so long, hoping that the finance would come as your land keeps appreciating in value. And while doing this, the state government came knocking at your door with an acquisition notice! If unfortunately, you do not have the necessary borrowing power, then JV just might be your life-line.
- You believe in the viability of real estate (probably in a particular location), you have the money to invest, but the plots are sold out in your desired location and no land owner is willing to sell. Or even there are plots for sale, at ridiculous amounts that’s just enough to purchase a diamond mine. If this is your case, then JV is the way to go.
- You want to maximize the commercial potentials of that 100 by 100 plot that is located at the heart of the CBD; but the two floors you can afford to build does not promise enough floor area to recover your investment in your lifetime. A joint venture with a financier might be your only chance of actualizing the number of floors that will enhance your desired income analysis.
- You have most other resources but your budget is too tight to accomodate professional fees for major experts, the inputs of whose are very essential to your project. Here you can structure a JV with your professional, making them stakeholders in the project upon completion.
There are quite many reasons to go into joint venture; what you lack is your own reason. And you should keep your eyes on that in spite of the loop-holes (which shall be discussed soon enough) involved in JV.
HOW DOES JOINT VENTURE WORK?
Ultimately, joint venture is all about “trade-off“. It is a barter in which you give what you have for what you don’t. This said, you will agree that Joint Venture is not for the greedy.
Going by the different cases of JV highlighted above, pay-off and benefits can take different forms.
It could be a synergy binded with the agreement that the financier would own the building for a stated period of time (within which he is supposed to recover his investment with a profit). After this period, ownership reverts to the land owner.
Another instance is when the real estate development is partly owned by the partners for life (in a percentage commensurate to the value of their individual contributions).
In a case where the expertise of professional have been brought to the table as input, an appropriate contract can be struck to compensate them over a specified period of time.
HURDLES IN JOINT VENTURE & HOW TO JUMP THEM
- Greedy Partner:
There is no other way to say it than as it is; the major issue that is likely to arise in a joint venture is greed! This happens when one party thinks that for him to win, the other party must lose.
This is a very unhealthy business notion; joint venture is a win-win thing, that is why it is called synergy and not parasitism. I was once consultant to a joint venture development in which the land owner expressed his intention to live in one of his own share of two (of a proposed total of four housing units). No eyebrow was raised at this until this client presented a brief (for his own personal apartment) that would eat up 50% of the total land area! Of course your guess is as good as mine on the financier’s reaction.
In a JV, equity must be achieved as much as possible. When multiple buildings are involved, all buildings must have the same specification (if they are to be divided equally), otherwise, their values and implications must be appropriately determined.
- Parasitic Synergy Agent:
Yeah! That’s what they call themselves –Synergy Agents! They’ve done well to link a stranded land-owner to a prospecting developer, only to suck the life-blood out of the project by demanding ridiculous commissions for a couple of phone calls they’ve made.
Don’t get me wrong; ‘agents’ are not vampires -if handled well. It is true that the JV would not have come to be without them, however, you need to make them realize what your resource constraints are and how their exhorbitant ‘percentages’ can kill the deal.
- Too Many Cooks:
It is no new knowledge that the risk of project failure increases with number of stakeholders. This is why a joint venture on the success path must try and minimize the number of stakeholders, otherwise there would be issues of investment recovery. Partners must be creative and resourceful enough to get all the ingredients in the least number of places.
- Hey, I’m doing all the work here!
This happens a lot on JV’s -whereby one partner complains of contributing more to the project.
Cast your mind back to the reason why you went into the JV and you will realize that it was to compliment each other. In other words, the inputs and efforts are not likely to look balanced on the surface. However, for the sake of equity, contributions can be valued monetarily in order to strike the desired balance.
- That is not what we agreed on!
Well, that is why we have the word “agreement” in the first place. Clear working terms and conditions must guide a joint venture in order to forestall future arguments. Do I even need to mention this? Like you don’t know the importance of a JV agreement!
Now, should I go into a joint venture?
Please do, if you are the type that likes to eat your cake and still have it. JV is the way to go since it’s the only way you can get to eat half of your cake and still have the other half!
