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The real estate sector in most of the metropolitan cities around the world are experiencing boom. This has given rise to a number of joint venture agreements being signed between real estate developers and land owners. Land owners who have mostly inherited their properties have no insight into the legalities involved. They get into joint venture agreements based on faith, relying on the words of real estate developers and many a times find themselves in trouble. There are numerous instances of land owners being left in the lurch after entering into joint venture agreements. Their lands are locked for many years with no signs of the proposed development projects taking off. Land owners can neither sell their lands to other prospective buyers nor get into new joint venture agreements.
This article highlights tips which land owners can make use of to safeguard themselves before getting into a joint venture with real estate developers. Let us begin by understanding what a joint venture is and its related terms. A Joint venture is an association between two or more participants for a specific business purpose and for a limited duration. A joint venture comes to an end once the business purpose is achieved.A joint venture is characterized by risk sharing, combining capital and expertise of the involved parties and speculative objectives. A joint venture can be organized as a partnership firm, a corporation or any other form of business organization which the participants deem fit. A real estate joint venture is mostly organized as a limited partnership where limited partners are the ones who provide most of the equity capital. General partners are responsible for managing the assets while contributing a small portion of equity capital. A joint venture is not a legal form of organization and hence a joint venture agreement needs to be created. A joint venture agreement includes details of construction, profit sharing in percentage, and time-frame. The land owner usually provides his land and provides no further investment. All other aspects of construction, investment and obtaining the required approvals is the responsibility of the real estate developer. Profit is shared such that it benefits all participants.Factors to be reviewed while drafting a joint venture agreement Capital Contribution: The capital to be contributed by all participants should be clearly specified. The agreement should specify the initial capital contributions to be made by all and how future capital contributions will be done. Share in cash flows: There are two types of cash flows. One being annual cash flow obtained by operating the property and the other being cash flow received from sale of property. The participants’ share in both these types of cash flows needs to be specified.Preferred Return: The type of cash flow to be used for paying the preferred return to the participants needs to be mentioned, if required.Profit Sharing and risk sharing:Participants must share the profits and losses in proportion to their ownership interests. Proportion of sharing taxable income (or losses) and capital gain (or loss) may also be based on the proportion of distribution of annual cash flow. All participants must share the financial, legal and operational risks in proportion to their ownership interests. If risk is shared by all the participants, impact of risk on individual participants is reduced.Management and control: Participants who control the property’s operation must be specified. Participants who will be involved in management decisions related to capital, leasing, financing and sale of property needs to be specified.Tips for land owners while getting into a real estate joint venture agreement:1. Background check of developers needs to be done to verify their credibility and success rate in previous projects.2. Register a new company as a private limited company and transfer your land to the books of this company. This needs to be done before entering into a joint venture agreement with the builder’s company so that the agreement is between two companies where one provides the land and the other provides investment and expertise.3. Decide on the profit sharing ratio with your developer. Usually the percentage of profit sharing in India is 1/3rd and 2/3rd, where 1/3rd of the cash inflow from the sale of housing units is for the land owner and 2/3rd is for the developer. A better bargain is to get the appropriate number of housing units assigned to you in the joint venture agreement along with a clear mention of the number of units, floor and size of the units4. Seek the services of a legal company with the right expertise to represent you.