3 STEPS TO NOTE BEFORE YOU SIGN A JV AGREEMENT.

Recently two multinationals announced they intend to launch a Real Estate joint venture. The companies, Prudent Financial Inc. of the United States and China’s Fosun Group said they were entering into a partnership aimed at expanding both companies and investing in development projects in urban centers in China. Closer to home is the recently announced Lafarge Wapco and LAPO microfinance bank 1billion Naira partnership to build affordable housing for 200 low income earning Nigerians. This type of Joint Ventures exist a lot in the Nigerian Real Estate market, where two industry players partner on building projects for profit. A successful Real Estate Joint Venture strategy is dependent on doing the right thing at the right time.

Joint Venture is an agreement between the landowner and the developer to undertake a real estate project. The Landowner here has the land but do not have the expertise and fund while the developer does not have the right land but have expertise and funds.

THERE ARE 3 TYPES OF JV:

1. Between Landowner and Developer

2. Between Landowner, developer and Funder

3. Between Landowner, developer and contractor

Although Joint Ventures represent a great way to pool capital and expertise and reduce the exposure of risk to all involved, they do present some unique challenges as well. I.e. if party A comes up with an idea that allows the Venture to flourish, what cut of the profits is party A entitled to? Does the party simply receive a cut based on the original investment pool or is there recognition of the party’s contribution above and beyond the initial stake? These are popular questions that arise in the cause of a Joint Venture. This is why a contract is crucial for avoiding trouble later; the parties must be specific about the intent of their joint venture as well as its limitations.

A joint venture can terminate at a time specified in the contract, upon the accomplishment of its purpose, upon the death of an active member, or if a court decides that serious disagreements between the members make its continuation impractical.

Upcoming developers commonly use Real Estate Joint Ventures. However notable developers such as UPDC and Megamound have also adopted this strategy. A Real Estate Development Joint Venture Agreement sets out what each party will contribute, both in money and effort, and sets out each party’s duties and obligations. It also sets out what happens if the parties fall out with each other, as well as covering the division of profits or losses.

Joint Ventures have been in existence since the early 1800’s but become popular in the 1980’s when companies where searching for new strategies and competitive advantages. We have highlighted key points to remember when going into a Real Estate Joint Venture and they are:

1. Step carefully, Choose wisely: This is not a race. Sophisticated Real Estate investing with or without financial backing is about long term wealth creation not short term riches. Pick what works for you and pursue what makes sense to your plan.
2. Follow a proven course of action and always test your strategies: The strategies you adopt will be your own, but the mistakes you avoid can be based on lessons learnt from others who have taken the same path. Make continuous improvement a business goal.
3. Be informed: It’s necessary to know the laws and practices of the Real Estate sector so you don’t run afoul of any one while entering the Joint Venture. Read journals and newspapers in a bid to have information on venture you are trying to enter; research on your partners to know their capabilities and where they would comfortably compliment your efforts.

 In the end, the Real Estate investment decisions, good or bad are your responsibility. You must understand and accept that mistakes are liable to happen; when they do, own them and move forward. Don’t blame others. When appropriate, give yourself credit for lessons learned, gain experience and make progress.