BANKING ON PROPERTY JOINT VENTURES

The climate in the world of property remains tough.

Property owners have seen the value of their sites slashed and are struggling to service debt or sell land. Banks are demanding higher equity contributions to maintain existing and make new loans. Many of our most experienced and highly regarded property executives are sitting at the desk of their new start up company trying to find a site where they can add value. Investors are desperately seeking property ventures that will deliver them a profit.

All of the elements of a successful property venture are waiting to be pulled together to get UK plc back on track. In a bid to pool resources, spread risk and provide effective vehicles for indirect investment, it is inevitable that an array of joint venture, partnership, equity finance and investment vehicles will now take centre stage.

Working out the best structure to bring these diverse elements together requires agreement in three key areas: control; profit sharing; and exit strategy. You need to know who will vote on key decisions and who will run the venture day to day. You need to agree how profits will be split and how those who contribute time and expertise will be remunerated. Finally you need to know when and how you will exit from the structure and what will happen if things do not work out.

The traditional UK joint venture limited company is likely to remain a popular, simple vehicle, to provide shareholders with limited liability and the ability to own land and borrow money without material regulatory restrictions. However, tax and disclosure requirements are continuing to lead the market to seek alternative structures.

Many of the negatives of these traditional vehicles were overcome by the introduction of limited partnerships and limited liability partnerships. Combined with offshore structuring these vehicles are emerging as popular and effective investment and development vehicles.

The further relaxation of the rules governing Real Estate Investment Trusts (REITs) and their acceptance in over 20 countries globally has renewed interest from both individual and institutional investors in these indirect property investment vehicles.

However the complexity and the costs involved of establishing joint venture companies combined with the lack of equity of those with property expertise has seen the increasing popularity of simple profit sharing “Promotion” agreements, whereby property professionals manage an assets, enhance value and receive anything up to 25% of uplift in value.

Simple trusts, profit sharing leases, profit sharing development agreements and similar contractual arrangements are also providing effective solutions where the number of parties is limited. Often they can be structured to avoid the need for public filings and regulatory restrictions on investing and borrowing.

Close working relationships are a key to all successful joint ventures. Choosing the right partners with the experience, commitment to the market and most importantly people who share the same aims and ambitions are critical to enabling the parties to prosper.

If you have concerns or queries regarding the issues covered by this note, please contact any member of Hill Hofstetter commercial real estate team for assistance.

Article written by Sue Simpson.