Definition of “Joint Venture” A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants' other business interests. Regardless of the legal structure used for the JV, the most important document is the JV agreement that sets out all of the partners' rights and obligations. The objectives of the JV, the initial contributions of the partners, the day-to-day operations and the right to the profits (and responsibility for losses) of the JV are all set out in this document. It is important to draft it with care, to avoid litigation down the road.
The prices of property in major cities and especially in Nairobi and Mombasa have sky-rocked in the last few years. Besides, the cost of borrowing has been generally been high and at mostly unpredictable. Taking these factors and others into consideration, it is becoming increasingly difficult for both land owners and property developers to develop or implement Real Estate Projects.
Why joint ventures for land owners?Besides the above, land owners suffer from lack of knowledge on how to negotiate a good deal. Also, many a land owners may not have witnessed such arrangements in the past. Others fear to be conned by unscrupulous developers. Moreover, there is a danger that the developer may not keep part of his bargain after the commencement of the project and thus exposing the land owner to financial loss and unnecessary disputes. For a real estate developer, his major concern is to ensure that he gets a good title on which he can implement the project and recoup his value with minimum risk. A real estate developer is also interested to have liberties like on construction decisions, being able to advertise the proposed project and make off-plan sales. Moreover, upon commencement of the project implementation of the project, the developers want to be sure that he can start selling the units and implement the project without unnecessary interferences from the land owner. As more Kenyans seek ways of owning property, joint venture agreements are becoming increasingly popular. Joint ventures are agreements between land owners and investors that aim at developing real estate property with mutual gains to both parties. To bridge this gap, it is advisable for land owners and owner of capital or real estate developers to come together and devise ways of pooling their respective resources together in order to achieve meaningful results. Indeed, if the recent developments in Real Estate are anything to go by, the future of real estate development is in joint venture real estate projects. For real estate joint ventures to work, it is then important to consider salient features of such an arrangement and get a lawyer extremely conversant in Land matters and development projects to prepare relevant documents which will protect the parties' interest and address their concerns.
The general steps involved are as follows:
1. Site Visit First, the land owner takes the investor to the proposed site for the investor and his team to inspect it and establish the viability of undertaking a project on it. The factors they consider include the infrastructure, size and shape of the land, ground level, neighbourhood, area zoning and proximity to basic amenities. This enables the investor to determine the most appropriate type of development for that particular parcel of land, that is, whether it is suitable for residential apartments, town houses or perhaps even a commercial building. At this stage the investor should ask for a copy of the title documents where his lawyers and team should carry out extensive and proper due diligence in regards to;
After visiting the site and coming up with a raw concept of the nature of development to be undertaken, the investor makes a proposal to the land owner, which in most cases consists of a offering a percentage of the built-up area to the land owner towards the cost of the land, and profits. This is arrived at after taking into account factors such as the cost of the land, the cost of construction, escalation in cost of construction, the cost of obtaining approvals for the project, legal, marketing and administrative expenses, and the selling price of the units in the project (cost- benefit analysis).
Land owners who do not want to get involved in the day-to-day running of the project, or to be responsible for any losses associated with the project, prefer this arrangement. The land owner is free to dispose of the constructed property delivered to him/her under the joint development agreement, to retain his/her share of the built-up area, or to sell it at a later stage without the investor’s involvement. The remaining built-up areas, apartments or houses are allocated to the investor.
The proposal can also be in the form of returns and profit-sharing ratio between the parties, depending on the agreed contribution by each side.
If the land owner accepts the investor’s proposal, they can start the formalities of drafting the main agreement, and the land owner avails copies of the title documents for verification by the investor’s advocate.
Once the investor’s advocate approves the title, the advocate makes a draft copy of the joint development contract, laying down the terms and conditions of the development and operation(s) therein, and presents it to the land owner for approval. Usually the land owner gets his/her advocate to look at it before approving it. If everything is okay, the contract is signed by both parties, stamped, and in most cases registered under the Registration of Documents at the Ministry of Lands.
Once the joint venture agreement has been signed, a special-purpose company is formed, with the singular aim of fulfilling the obligations and intent of the joint venture agreement. The new company formed should, ideally, be registered as a private limited company under the Companies Act under the Laws of Kenya.
In line with the joint venture contract, the land owner avails to the investor’s advocate all deeds and relevant documents to facilitate the registration of the transfer of the land in favour of/ in the name of the JVC.
By this time- the contractor and consultancy team for the project will have been formally appointed. The investor will have the plan prepared by the project architect, taking into account the land owner’s requirements, and when ready and approved by the landowner, the same will be submitted to the relevant government authorities for approval. In most cases, the terms of the joint venture agreement stipulate that all the procedures, formalities and cost of approvals be catered for by the investor. Once the approval of the relevant bodies has been received, work can begin and adverts placed indicating the availability of units in the project for sale.
On completion of the project, the built area/ houses allocated to the landowner are handed over to him/her. The landowner is free to sell any of the houses allocated to him/her at any stage of the construction, or even after completion. The formula for sharing profits will have been negotiated and agreed upon before the signing of the agreement, which clearly spells out the terms.
In light of the foregoing factors, a good joint venture agreement that caters for and adequately addresses parties’ interests and concerns cannot be gainsaid. A good joint venture agreement, should at a minimum address the following factors, amongst others:-
1. Selection of the requisite consultants- It is advisable for the parties to agree on the relevant consultants to be involved in the projects. These consultants should include the project architect, the project contractors, the quantity surveyors, the structural engineer, the project surveyor, the project physical planner, the project valuers, project accountant and the project lawyer. The party to bear the consultants' fees and the contracting terms of each consultant, amongst others, should also be agreed upon.
2. Valuations by the Quantity Surveyor and Valuer – the profit sharing ratio is mostly determined these two consultants’ reports. Normally, the market value of the land is what is assigned as Capital Equity injected by the Land Owner. The project quantity surveyor should then try to quantify the full costs of proposed project and the variables are done. This is an extremely crucial area as it determines a basis for deriving the profit sharing formula to be used.
3. Transfer of land to the development company- If the title to the land is in the name of an individual, it is preferable for it to be transferred to a development company/special purpose vehicle or the joint venture company. This the vehicle through which the project will be implemented. Initially, such company should only be formed with the land owner and his family member(s) as the first shareholders and directors. The real estate developer should only be incorporated into the company after he has invested some funds into the project. The lawyer should factor in Legal Notice Number 92 0f 2007 dated 14th June 2007 by Hon. Amos Kimunya (the then Minister for Finance) as hereunder:-
LEGAL NOTICE NO. 92 OF 2007
THE STAMP DUTY ACT
(Cap. 480)
EXEMPTION
IN EXERCISE of the powers conferred by section 106 of the Stamp Duty Act, the Minister for Finance directs that any instrument that is executed in respect of the transfer of a family property to a limited liability company whose shares are wholly owned by the family be exempt from the provisions of the Act.
4. The change of user and development approvals- The parties (mostly the developer) should ensure that the change of user of the property is processed by the relevant local authority and the lands office. Moreover, requisite environmental and development permits and permissions should be processed. The types of permits or approvals to be procured depends upon the type of development intended to be implemented by the parties.
5. The Types of project and quality of finishings- Preferably, since both parties are equally interested in the type of the project to be implemented on the property, they should jointly agree on this with the help on the project architect. This will also be influenced by the zoning regulations, the permitted user of the land and the costs implications. The agreed and approved project plans should be registered at the lands office, and copy attached to the JV agreement. Besides, the parties should agree on the qualities of the finishing and these can be attached in a schedule to the agreement.
6. Project milestones and timetable- The parties should agree on various timelines including the hiring of consultants, the ground breaking date, the construction phase and expected project completion date. The project manager, the project architect and the contractors can assist the parties to come up with practical timelines.
7. The roles and obligations of the parties - The respective roles and obligations of the parties should be set out in the joint venture agreement and consequences of default or breach also defined.
8. Shareholders' Agreement- The parties need to agree on the project management issues in the development company, and should preferably execute some form of a shareholders' agreement. Amongst other things, such a shareholders' agreement should cover issues like, the company chairperson, directors and the management structure, the decision making fora and rights, meetings, reserved matters which require unanimity or special majority vote, the dividend policy, keeping of books of account and audit and disputes resolution mechanisms. Such an agreement should also provide for pre-emption rights on transfer of shares and methodology of admission of new shareholders (if a need arises). We prefer a structured joint venture with a laid back land owner.
9. The sharing of the project value or profits- The parties may agree on sharing of profits after catering for all project costs including the costs of land which is refunded to the land owner or share the units developed proportionate to their respective contributions or as may be agreed.
10. Decision Making and Parties Representatives-The parties should agree of the modes of making decisions concerning their joint venture projects. The day-to-day management issues can be delegated to the project manager or architect assisted by at least two representatives; one from the developers and the other from the land owner. Major decisions can be taken in stakeholders monthly or quarterly review meetings. Normally, a project implementation committee comprising of representatives of the developer and the Land owner(s) is formed as per the JV with lawyers from both sides sitting in as ex-officio members of the same. This committee should meet at least monthly for smooth flow of information.
11. Project financing-In some joint venture arrangements, the developer is able to finance the costs of the development on his own or from off-plan sales. This might be from savings or external financing. Some developers may also seek to borrow funds from commercial banks and other financial institutions using the land owner's property as collateral. In the latter case, this should be agreed upon between the parties since it exposes the property to attachment or forced sale in the event of project failure or lack of cash flow to finance the loan repayment should be able to raise capital to implement the project.
12. Force Majeure- These are unforseen factors or circumstances, and normally outside the control of either party, which might affect the implementation of the project or delay its completion. The JV agreement should anticipate and make provision for force majeure events.
13. Breach, termination and dispute resolution- The JV agreement should cover the consequences of breach by either parties, consequences of breach , the grounds of termination (if any), and mode of resolution of disputes. It is also important to provide that parties would be at liberty to invite additional investors in the event of lack resources to complete the project on their own.
14. Taxation- Lack of compliance with the tax laws can expose the parties to huge financial penalties which might wipe out expected profits or value of the project. Thus, parties should comply with the tax requirements including payment of withholding tax on consultants’ fees as well as corporate tax on profits.
15. Insurance - to mitigate against various risks, the parties should ensure that the project is insured at all times during the project implementation phase.
16. Sales and Marketing- In order to realize their gains, the parties should come up with an elaborate marketing plan for their projects. They should also appoint the project selling agents who will be involved on the sale of the developed units. The project lawyers should also be able to prepare requisite sale agreements and other documentation and handle the stamping and registration formalities in a timely manner.
17. Other normal clauses, time, confidentiality, good faith, addresses for serving of notices, procedure of serving notices etc should be there.
The benefits of joint venture arrangements
1. Access to expertise, more resources and finance
Many land/property owners with underused properties, or run-down buildings or undeveloped parcels of land have limited resources and, therefore, cannot develop them themselves. By entering into joint venture agreements with stronger, more established partners; such people can derive a lot more from their properties/land.
Critical intellectual property and technology are among the resources that are often difficult to build in-house, so by entering into joint ventures with companies that have these resources; land owners can get access to such assets.
In most instances, the investor has the technical expertise and finance that the land owner requires to successfully develop market and sell the project. Therefore, coming together in such ventures affords each party access to the other party’s resources for free. Financial institutions are also more likely to fund a project in which a well-known company (investor) with a good track record is involved rather than one undertaken by a new entity. Land owners also benefit in that they do not pay interest on bank loans since, as joint venture partners, most investors will provide equity financing.
2. Access to larger markets and networks
Where a land owner in the real estate industry partners with an investor in the same field, they can reach a wider market than they would individually. This is because they can combine and expand their sales forces and target market, resulting in larger, more diversified revenue channels.
Joint ventures often enable growth without the land owner having to inject additional funds or look for outside investors. The parties can see each other’s customer database to market the project and their properties, and offer each other’s services and products to their existing clients. Joint venture partners can also benefit jointly buying what they need, research and development.
3. Room for flexibility
Typically, a JVC is valid for the duration of the project. However, during its validity, the participating parties do not have to cede control of their businesses to the company they form entity, nor do they have to stop ongoing operations. Each company can maintain its identity and return to normal business once the joint venture is complete.
4. Accessing previously inaccessible businesses
It is common for joint ventures to be between large organizations and much younger/smaller companies or individuals who own the land but do not operate in the real estate field. By collaborating with an established company, land owners not only gain from the expertise of these companies, but also increase their credibility in the eyes of the public and potential buyers.
Many land owners who are young or new entrants in the real estate business will ordinarily struggle to build market credibility required to form a strong customer base. Entering into a joint venture arrangement with a well-known brand helps establish credibility, enabling them to engage with big players in the real estate industry, which is difficult to establish as an individual.
The converse is that the big players are able to access prime land held and owned by individuals.
5. Expertise, experience and knowledge gain
For land owners who are new in the real estate industry, acquiring the knowledge and expertise necessary to operate in this market is time-consuming and costly. Partnering with established companies that have the relevant expertise required for entering target markets can allow such land owners to reduce the time it would otherwise take to develop the expertise. During the execution of the joint venture, the land owners are exposed to the specialized expertise and knowledge by the investor and his team of experts and can learn from them.
6. Shared resources and responsibilities
Joint ventures also have the benefit of shared risk among the parties. Undertaking a new development as an individual land owner carries a huge of risk, which many people cannot bear alone. Under a joint venture arrangement, the parties pool resources, reducing the burden of getting finances and making the requisite technical expertise less of a challenge. The risk of the project failing and having a negative impact on profitability is lower because the costs associated with the project are distributed between the parties. When a joint venture is successful, the parties share the profits as agreed. Similarly when a joint venture fails, every party bears its portion of losses.
7. Save threatened property
There are instances where a land owner might wish to develop his/her land, and in addition to the lack of funds and required technical expertise, their lands is also encumbered e.g by loans, unpaid lands rates, etc. Joint Venture arrangements have seen many such properties rescued from imminent auctioning by investors who come in and shoulder/clear the encumbrances.
