A Joint Venture is like a partnership, but is not open ended as a business partnership can be. It is entered into for a specific purpose, generally an investment purpose. The terminology used for the Money Partner is Investor and for the Vendor Financier is Co-Venturer.
A Joint Venture for Real Estate Investment is entered into to carry out a project upon a specific property. It might be a simple project such as the purchase of a property for rental or a more complex project such as purchase for vendor financing with positive cashflow or a purchase for development and sale.
The essence of a Joint Venture for Real Estate Investment is a profit share which involves a profit split, rather than the charging of a fee or commission by one party to another. Nor is it a loan arrangement, where interest is payable.
Joint Venture Agreements with Money Partners for Real Estate Investments will have these features:
- A Joint Venture
Agreement for vendor finance
is an agreement between an
Investor and a Co-Venturer
to purchase a property which
is to be sold using either
an Instalment Sales Contract
or a Lease/Option to
document the sale.
- A Joint Venture
Agreement for development of
a property will provide for
the development and sale
(under normal terms) of a
property.
- In a Joint Venture for
Real Estate Investment for
vendor financing or
development, the Investor
contributes the funds for
investment while the
Co-Venturer contributes the
expertise to bring the
project to fruition.
- The respective
contributions of the
Investor and the Co-Venturer
are specifically set out in
the Joint Venture Agreement
and consist of both initial
contributions and continuing
contributions. The Joint
Venture project has three
phases:
Phase 1: Acquisition of the property
Phase 2: Conduct of the venture
Phase 3: Termination
- In phase one, the
property is purchased in the
Investor’s name. The
Investor’s interest is
therefore as legal owner of
the property.
- The Investor’s initial
contribution is to fund the
purchase of the property
usually with a mixture of
the Investor’s own funds and
by loan against the
property. The contribution
from the Investor’s own
funds consists of the
deposit, the legal costs,
stamp duty and loan expenses
for the purchase, and is
treated as a capital
contribution.
- In phase one, the
Co-Venturer negotiates the
purchase of the property.
The Co-Venturer does not own
the property and therefore
does not guarantee any loan
taken out against the
property.
- The Co-Venturer’s
initial contribution is to
select and co-ordinate the
purchase of the property,
carry out any agreed work,
and to arrange the sale of
the property under an
Instalment Sales Contract,
Lease/Option or Standard
Contract for Sale.
- In phase two, the
contributions continue in a
different form. The
Investor’s continuing
contribution is to advance
further funds if required to
fund shortfalls, whilst the
Co-Venturer’s continuing
contribution is to ensure
the performance of a
Purchaser under the
Instalment Sales Contract or
Lease/Option.
- The money received from
the Purchaser under the
Instalment Sales Contract or
Lease/Option is applied in
this order
(i) Loan Repayments on the property
(ii) Joint Venture Expenses
(iii) Net Profits divided 50:50 between Investor and Co-Venturer.
- The Net Profits that are
distributed 50:50, include
the deposit and all other
profits. The deposit that is
repaid to the Investor is
applied as a repayment of
the Investor’s Initial
Contribution.
- Example of distribution
of Net Profits:
(i) Application of deposit
Receipts
Cash deposit received $3,000.00
First Home Owners Grant $7,000.00
Total Deposit received $10,000.00
Payments
Deposit split 50:50
Investor receives $5,000.00
Co-Investor receives $5,000.00
(ii) Application of the ongoing receipts and payments under the Joint Venture Agreement
Receipts
Monthly Instalment received (balance price: $113,000 at 9%) $950.00
Monthly Rates Contribution received $130.00
$1,080.00
Payments
(i) Mortgage payment – monthly ($90,000 at 6.5%) $610.00
(ii) Joint Venture expenses:
• Rates & Insurance – averaged monthly $130.00
• Bank Account charges – monthly $10.00
(iii) Investor payment – monthly $165.00
Co – Investor payment – monthly $165.00
$1,080.00
- Sometimes the Investor
requires a guaranteed income
for an agreed period. This
can be provided for in the
Joint Venture Agreement.
- Phase three is
termination. The Joint
Venture can end in these
ways:
(i) the sale of the property is completed, which in the case of an Instalment Sales Contract or Lease/Option will be when the Purchaser pays the balance outstanding;
(ii) the Investor buys out the interest of the Co-Venturer in the Joint Venture Project, or vice versa;
(iii) no property is purchased within six (6) months.
- The most usual way for a
Joint Venture to end is when
the Purchaser pays out an
Instalment Sales Contract or
Lease/Option Agreement
within 2 to 5 years of
entering into it. In that
event, the following order
of distribution applies:
(i) After draft accounts are prepared, the third party creditors are paid.
(ii) The Investor’s Initial Contribution is repaid, whatever is outstanding after the Investor has received their share of the deposit at the beginning of the transaction.
(iii) The balance is distributed equally.
- Example of Distribution
on Termination
Balance price $110,000
Less bank repayment ($90,000)
$20,000
Less legal costs and
other expenses ($500)
$19,500
Balance Initial Contribution
Paid to Investor $5,000
Balance split 50:50
Investor receives $7,250
Co-Investor receives $7,250
- The Investor and
Co-Venturer are locked into
the Joint Venture Project
for some time. The project
must run for a minimum
period of 5 years, after
which either the Investor or
Co-Venturer can offer to
sell their interest in the
property or in the Joint
Venture (as the case may be)
to the other. The other
cannot be forced to take up
the offer. This method of
ending the Joint Venture
Project is deliberately open
ended.
- The more practical
course, if one party wants
to end the Project, is that
take out finance be found
for the Purchaser to pay out
the balance price payable
under the Instalment Sales
Contract.
- If the Instalment Sales
Contract is terminated,
often an Investor will
negotiate to purchase the
interest of the Co-Venturer
in the project and end the
Joint Venture Project in
this fashion. The amount of
the payment is calculated as
the amount the Co-Venturer
would have received had the
Instalment Sales Contract or
Lease Option been paid out
at that time by the
purchaser.
- Joint Ventures for Real
Estate Investment are
generally unincorporated.
What is meant by this is
that a company is not formed
as an “umbrella” for the
carrying on of the joint
venture. If there is a
property development
involved or the enterprise
is large and continuous,
then the Joint Venture
should be carried on through
a company. Either way, there
should be a Joint Venture
Agreement prepared and
entered into by the Investor
and Co-Venturer.
- Once the Joint Venture
Agreement is signed, it may
or may not need to be
stamped with stamp duty. If
it does, the duty will be
normal. The Joint Venture
Agreement is not able to be
registered.
- If the property cannot
be sold by way of Instalment
Sales Contract or
Lease/Option, then the
property can be sold under a
normal contract. If the
property remains unsold for
three (3) months then the
Investor can force the sale
of the property, which will
lead to the termination of
the project.
- The documentation to be
used is:
Joint Venture Agreement – Real Estate Investment
with equal profit share; or
Joint Venture Agreement – Real Estate Investment
with guaranteed income.
