First Joint Venture

[Reality Cheque]

Hi all,

I'm looking at doing my first JV and have a few questions.

I have a block of land and I've been approached by a builder who has offered to fund and build a house on the land with a view to selling on completion.
Although we haven't done any costings yet it would end up about a 50/50 share.

My main concerns are-

-I own the land outright and probably wont need to outlay any money. The builder is borrowing the money for the build. I'm worried about what will happen if the builder defaults on his loan. I'm wondering if it is possible for the bank to hold security over other property that the builder owns so that a default would not affect the JV property.

-What would be the best structure to do something like this. I've heard of a unit trust for JV's?

-The builder is taking on a lot more risk than me and therefore may end up in a position where he is keener to sell than me. Do things like expected sale price range and time to sell usually get written into contracts or it it just a case hoping that things work out ok.

-Is it best that both the builder and I sit down with a solicitor and draw up an agreement or do we both use our own solicitor as you would with a normal transaction.

From what I've described would someone care to explain the steps we need to take to get this JV off the ground. Neither the builder or I have been involved in a JV before.

Thanks in advance.

RC

 

[Lupo]

I work in alot of JV's, its key to always have solicitors either present, even some other advisors that work in JV's in property or business. Everything must be on paper with the JV both parties have to have equal share in the risk and gain, also remember that any investor or JV depending who holds more value, as it seems you are, since your the land holder, you must make him understand that any monies/equity put into the development that incur a loss can't be used as leverage in court. If you lose it, you lose it.

So in other words, if I were to invest with you (JV) and some reason I lose money from somewhere or something goes south, I can't decide to take you to court to try and get my money back, this is where its crucial both parties hold 50/50 share in everything.

Alot of investors/developers/entrepenuers are very optismist people. Its always better to be more on the pessimistic side, because good hope won't make you money nor will it regain it.

I witnessed a major JV go south with another partner of mine, where they were building a mutli storey, project took 2 years to build, the builder had 2 children, horrible accident the builder was killed on site due to crane collapse and the profits where then distributed to his kids because of his 'will'. My partner lost a signficant chunk of his own money because of this.

You must cover all aspects of the JV so its as air tight as it can be.


Good Luck.

 

[Terry_w]

Hi all,

I'm looking at doing my first JV and have a few questions.

I have a block of land and I've been approached by a builder who has offered to fund and build a house on the land with a view to selling on completion.
Although we haven't done any costings yet it would end up about a 50/50 share.

My main concerns are-

-I own the land outright and probably wont need to outlay any money. The builder is borrowing the money for the build. I'm worried about what will happen if the builder defaults on his loan. I'm wondering if it is possible for the bank to hold security over other property that the builder owns so that a default would not affect the JV property.

-What would be the best structure to do something like this. I've heard of a unit trust for JV's?

-The builder is taking on a lot more risk than me and therefore may end up in a position where he is keener to sell than me. Do things like expected sale price range and time to sell usually get written into contracts or it it just a case hoping that things work out ok.

-Is it best that both the builder and I sit down with a solicitor and draw up an agreement or do we both use our own solicitor as you would with a normal transaction.

From what I've described would someone care to explain the steps we need to take to get this JV off the ground. Neither the builder or I have been involved in a JV before.

Thanks in advance.

RC

I suggest you sit down and work everything out in minute details and consider all possibilities and include:
- insolvency
- divorce/family law
- death
- when to sell
- how much to sell
- running out of money
- who does what
- who pays for what
etc
etc

Then go and see a lawyer to get some sort of agreement drawn up.

Also, how is the builder going to borrow? Does he have other property as security? As you are the land owner he cannot borrow against your land. You would have to go on any loan using the land as security.

He or others can take charges over the fittings other than land. For example he may get a plumber to do the toilets and drains etc. The plumber may install first with payment later, but he will retain title to the goods until final payment. If the builder goes insolvent and cannot pay the plumber may come back and pull out toilets and drain pipes etc.

Also see what other assets the builder owns in his own name. If there is some sort of problem you want to know if he has any financial substance.

 

[Reality Cheque]

I work in alot of JV's, its key to always have solicitors either present, even some other advisors that work in JV's in property or business. Everything must be on paper with the JV both parties have to have equal share in the risk and gain, also remember that any investor or JV depending who holds more value, as it seems you are, since your the land holder, you must make him understand that any monies/equity put into the development that incur a loss can't be used as leverage in court. If you lose it, you lose it.

So in other words, if I were to invest with you (JV) and some reason I lose money from somewhere or something goes south, I can't decide to take you to court to try and get my money back, this is where its crucial both parties hold 50/50 share in everything.

Alot of investors/developers/entrepenuers are very optismist people. Its always better to be more on the pessimistic side, because good hope won't make you money nor will it regain it.

I witnessed a major JV go south with another partner of mine, where they were building a mutli storey, project took 2 years to build, the builder had 2 children, horrible accident the builder was killed on site due to crane collapse and the profits where then distributed to his kids because of his 'will'. My partner lost a signficant chunk of his own money because of this.

You must cover all aspects of the JV so its as air tight as it can be.


Good Luck.

Thanks Lupo,

Good point about making sure he cant sue me for any losses. Because I acquired the land through subdivision it is actually costing me very little. It would be entirely possible for the builder to lose money on the deal whilst I'm making a profit. I could be "losing" money on current valuation but still profitable on actual cost. Not that the builder would know what my actual cost is though.

RC

 

[Reality Cheque]

I suggest you sit down and work everything out in minute details and consider all possibilities and include:
- insolvency
- divorce/family law
- death
- when to sell
- how much to sell
- running out of money
- who does what
- who pays for what
etc
etc

Then go and see a lawyer to get some sort of agreement drawn up.

Also, how is the builder going to borrow? Does he have other property as security? As you are the land owner he cannot borrow against your land. You would have to go on any loan using the land as security.

He or others can take charges over the fittings other than land. For example he may get a plumber to do the toilets and drains etc. The plumber may install first with payment later, but he will retain title to the goods until final payment. If the builder goes insolvent and cannot pay the plumber may come back and pull out toilets and drain pipes etc.

Also see what other assets the builder owns in his own name. If there is some sort of problem you want to know if he has any financial substance.

Thanks Terry,

I'm not going to proceed if I have to provide any form of security. As far as I'm concerned the builder would need other assets to secure his loan.

RC

 

[Aaron_C]

Who's going to lend the builder money to build on land that he doesn't even own? Unless it's a cash-out from his other properties...

 

[Reality Cheque]

Who's going to lend the builder money to build on land that he doesn't even own? Unless it's a cash-out from his other properties...

Yeah I guess what I mean is I don't want to be involved with the loan so I don't have to provide security.

RC

 

[Lupo]

Also I might add, 13 page agreements (usually property agreement or JV agreement) from a good solicitor shoud cost around $2200-3200.

Remember, people who deal with your assets and money are worth the weight in gold.

 

[Reality Cheque]

Also I might add, 13 page agreements (usually property agreement or JV agreement) from a good solicitor shoud cost around $2200-3200.

Remember, people who deal with your assets and money are worth the weight in gold.

That's another thing I need, a good property solicitor. My current solicitor hasn't been up to the mark even on much simpler projects.

If anyone would like to recommend a good property solicitor or if there is someone here who could offer their services feel free to PM me.

C

 

[Aaron Sice]

also, make sure you take the profit split FROM CURRENT MARKET VALUE of your land.

if you take it as total, the builder gets a share of your current equity.

small, but often VERY COMMONLY overlooked point.

 

[Reality Cheque]

also, make sure you take the profit split FROM CURRENT MARKET VALUE of your land.

if you take it as total, the builder gets a share of your current equity.

small, but often VERY COMMONLY overlooked point.

Thanks Aaron,

Have arranged for a valuation and everything from our point of veiw will be based on this.

Rgds

RC

 

[Peter 14.7]

As you own the land, why JV? Why not get a loan yourself and build via competitive tender?

Peter 14.7

 

[Reality Cheque]

As you own the land, why JV? Why not get a loan yourself and build via competitive tender?

Peter 14.7

I've got another block that I'm looking to build on myself. Cant afford to build on both myself though. Original plan was to sell one block and build on the other but that isn't working out. Joint venture has become plan B.

I've also never built before so I thought a JV would be a good start. I know the builder well and I could be fairly involved with his side of things as a learning experience before going it alone.


Still open to options other than a JV though.

Thks

RC