What is Joint Venture Land & Building Development? What are the advantages and risky sides? We will know the details about the Joint Venture Land & Building Development and will also assess the advantages and the risk factors in the context of BD.
Joint Venture Land & Building Development
What is a Joint Venture in real estate? In the sector of real estate, a Joint venture comprises a partnership between two or more parties. Those parties collaborate on the very same project. The parties may include landowners, investors, builders, and other stakeholders. All of them desire to reach a common goal and, in the process, tend to combine their resources, expertise, and networks. Basically, there are 2 primary parties: the landowner and the builder. The aforementioned party provides the land or property for development. On the other hand, the developer or the builder provides the financial, technical, and management expertise, everything that is necessary to develop the projects.
What are the types of joint ventures?
In real estate, basically, 3 types of joint ventures exist. Those are Landowner/Borrower Joint Venture, Equity Joint Venture, and Contractual Joint Venture.
Landowner/Borrower Joint Venture
In this system, the landowner contributes the land. Meanwhile, the borrower offers all the necessary financial resources required to develop the project. Both parties share in the profits and losses. However, they determine the proportion of profit or losses before the start of the project.
Equity Joint Venture
The involved parties build a new company, and they hold shares. The shareholding percentages of each party determine how much profit and loss each party will associate with.
Contractual Joint Venture
They define the terms of the partnership by signing a contract. The contract holds every detail, including the duration of the partnership, the contribution percentage of each party, as well as the proportion of profit & loss for all involved parties.
Advantages of Joint Venture in Real Estate
Shared Expertise and Resources
In a joint venture, all partners contribute their best expertise and resources. It increases the likelihood of success and also the profitability. For instance, a partner may offer industry knowledge while the other contributes with stable financial capital.
Reduction of Financial Risks
All parties share the financial burden, and hence, the project can help mitigate risks for all parties. It also increases the possibility of grabbing lenders’ financial assistance. Even if the project collapses, every party can share the burden and go for a rebuild in the next project.
Accessibility to New Location and Markets
In a normal sense, the access to an unfamiliar location or a new type of real estate project seems harder for a party. But with multiple partners offering strength on multiple sides, it becomes easier.
Collaboration & Innovation
A joint venture is always associated with diverse perspectives and skill sets. That’s why all these together are able to foster collaborative innovation. As a result, the involved parties can create unique and innovative solutions for their project.
Increased Credibility
When your project features reputable partners, it enhances the credibility. Thus, your real estate project would seem attractive enough to potential investors and customers.
Other Crucial Advantages include: Market Reach and Expansion, Capital Access, Diversification, Enhanced Flexibility, Competitive Advantage.
Disadvantages or Risk Factors of Joint Venture in Real Estate
Conflicts of Interest
It might be a major issue in any sort of joint ventures. Because there are multiple partners and every party has its own interests and objectives. Sometimes, those are contradictory. Thus, disputes and disagreements may arise and would be difficult to solve.
Divergent Objectives
Different parties may have different timelines or exit strategies. Eventually, those can result in disagreements and delays.
Shared Decision-making
The decision-making in a joint venture often includes collaboration of different shareholders and partners. Not only does it slow down the process, but it can also cause some serious problems among the parties.
Complication in Overall Management
There are various responsibilities and multiple central head units. In a traditional business system, generally, there is 1 party that controls everything, but in a joint venture, the management might turn into an issue due to the existence of various partners.
Imbalanced Contributions
If this happens, the entire system may face a problem because with imbalanced contributions, there would be rising concerns among the parties. This may demotivate the one who had the intention to work attentively. The one who contributes more capital or effort might end up expecting greater returns or authority, and that would cause another issue.
Unclear Responsibilities
There may arise a lack of clarity for each partner’s obligations, roles, and the division of work.
Cash flow problems
Any of the partners’ financial instability might make the entire project a messy one. They may suffer from cash flow issues as well.
Unexpected Costing
Sometimes partners may face unwanted necessary costs due to construction, materials, or other project aspects. It will eventually strain the budget.
Illiquidity
When you are partnering in a joint venture, your cash might turn illiquid because you won’t be able to invest it anywhere else during that tie-up.
Uncertainty
Factors like fluctuations in the economy, interest rates, or local demand, etc may decrease the overall value of the project and also may affect the sales price.
Regulatory Challenges
Complex laws, regulations, and contractual terms, etc, may turn out as a serious risk factor. One can face penalties or even project delays due to Non-compliance.
Contract Breach
Sometimes, a partner may fail to fulfill his responsibilities and breach the contract. It will make a huge impact on the overall project.
