Commentary
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
(a) Mortgage payment – monthly ($90,000 at 6.5%) $610.00
(b) Joint Venture expenses:
• Rates & Insurance – averaged monthly $130.00
• Bank Account charges – monthly $10.00
(c) 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.
Disclaimer: This outline and comments are intended to assist the understanding of the Joint Venture Agreement – Real Property Investment pro forma Agreements prepared by Cordato Partners specifically for Instalment Sales Contract application. You must consider your own personal circumstances when entering into the Joint Venture Agreement you should obtain your own legal and financial advice.