Joint Venture Development Finance
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Joint Venture Development Finance
Scott explains how joint venture development finance works.
What is joint venture development finance?
Joint venture development finance is usually one of two things. The first is finding a joint venture partner to help you with a project – that you didn’t perhaps have the capital to fund yourself. You find somebody to become your business partner and provide capital, and then go forward with development finance.
That’s probably the most common thing people are looking for. It then becomes standard development finance, you just have a business partner involved with you from the start. That’s the more common one, I think.
The other option is where the joint venture partner is your lender. They develop that project with you and take a shareholding and a share of the profit, too.
In essence, the whole thing works like development finance – it’s just about the structure: how that JV partner is involved and how you share those profits.
How does joint venture development finance work?
Typically, you’d enter into a joint venture agreement which outlines the contributions. They’re probably bringing the capital, you’re probably bringing the project. Maybe somebody’s drawing capital as well, depending on the circumstances.
The agreement confirms the roles, who’s going to be in charge and what they’re going to be doing. It might be that you want a silent partner, somebody who just provides capital, steps back and lets you get on with it. Or perhaps you want somebody who has experience in a particular sector.
Maybe you’ve gone from developing houses to hotels and you want somebody who’s got some experience to bring to the table. You define the contributions, the roles and the profit sharing at the end of that agreement.
The likelihood is that you’d refinance and one partner buys the other out. Or, you may sell the project and split the profits.
That’s the first step to cover off with the joint venture partner. Then, depending whether they are funding the entire transaction or just providing capital for you, the development finance itself will be a standard product.
Can you get 100% joint venture development funding?
It’s possible, but not very common. Again, I’m going to presume you have somebody to give you capital towards a project and you’re going to seek normal development funding.
Development lending will cover 100% of the build costs and a good portion of the land acquisition if that’s required. Typically you’ll see 50% to 60% loan to value on the land, or the acquisition of the project.
That does obviously fluctuate depending on the profit in the deal and its overall size. To get 100% joint venture finance you would probably have to cross charge other assets or your joint venture partner could bring something to the table. It can be done – it just depends on
who’s involved, what’s involved, how much lending you need and how we structure that.
What are the exit strategies for joint ventures? What happens to the joint venture once the project is complete?
Exit strategies are typically one of two things: sale or refinance. Predominantly, I see a lot of people go down the sale route. They want to use a joint venture partner for the first two or three projects, build up their own equity and then go away and do the projects themselves – without having to split the profits, basically.
But you can go down the refinance route, and if the project finishes with enough value to create equity, you can refinance and buy out your partner. You pay back their equity and any profits they are owed as well. So sale or refinance are two good options.
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What are the benefits and the drawbacks of joint venture finance for developers?
There are more benefits than drawbacks, most of the time. Having a joint venture partner will allow you to access projects that were perhaps out of reach. It allows you to to really scale up your business model and take on much larger projects from the start.
They could also bring more experience than you have in particular sectors, or the size of the development. If you’re going from building one or two houses at a time on a plot and wanting to build 30, 50 or 100 houses on a plot, there’s a big difference in how those are managed.
A JV partner who brings some capital to the table plus a wealth of experience can make a big difference to the profitability of those projects. So there’s a lot of benefits to having somebody involved.
The drawbacks are obviously that you have to split the profit with somebody. Depending on how much they’re bringing to the table, they may want the lion’s share of that profit. If they’re going to bring all the capital and a lot of experience, they’re certainly going to want a large proportion of the profit.
You’re really getting profit for identifying the opportunity – so you won’t make as much, but you’ve got a small slice of a much bigger pie. It’ll enable you to get that experience yourself and move on to your own projects at a later time.
Are there any alternatives to joint venture property development finance?
Yes, obviously there are traditional bank loans and private equity. There are some grants for different types of developments, depending on the project and what you’re trying to do.
If you don’t want to use a joint venture partner to do these developments, you’ll have to provide some form of asset to secure against. This could be your own home or a Buy to Let portfolio. Perhaps you have valuable watches, cars or art – we can lend against those things to secure the difference.
We can piece it together in different ways – even contract finance or invoice financing, if you’ve got a trading business. There are lots of ways we close the gap if you don’t have the capital for a project but don’t want to profit share with a partner.
How does the application process for a joint venture development loan work and how long does this process take?
This would technically be a standard development loan. Depending on the size of the project or the funding, I’d expect to have terms out to a client within 10 days. Then we see whether the project goes ahead.
You might have had an offer accepted, or the project us on land you already own. Formal terms and valuations take a couple of weeks, so you could have full funding within six to eight weeks.
One thing to bear in mind is that if you have a joint venture partner involved, you want to front-load that with probably two or three weeks worth of legal work. Make sure your contract is watertight with that partner before setting up the development loan.
So there’s probably some time at the front there, to ensure you’re secure and safe in the eyes of your lawyer before moving forward with the actual development.
How can a broker help here?
Obviously, we can help with the development side of things, making sure we find the right lender for the right project. We’ll secure the best terms we can and negotiate what we need to. We chase up legal teams, the valuer and the lender to make sure the process is as smooth as possible.
On occasion, you might come to us with a project you’ve found where you need a partner. We do sometimes have clients where we make introductions to potential partners to kickstart a project.
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