Real estate joint ventures

Real estate joint ventures

March 2023

In the past five years, the Egyptian real estate sector has performed well, generating returns of more than 10.0% annually for investment grade properties and thus attracting the interest of landowners and investors. The main ways to invest in real estate include (1) development and exit through sale or lease, (2) purchase of real estate products for capital gains and rental returns, and (3) purchase of structured products backed by real estate such as warrants and real estate investment trusts (REITS). Landowners, in particular, are increasingly interested in real estate development but are constrained by (1) financial ability, (2) development expertise, and (3) the time required to undertake the development themselves

Unbeknownst to many, joint venture arrangements with reputable developers are the wisest way to capitalize on the benefits of real estate. This month, we demystify real estate joint ventures and explain their benefits.

What is a joint venture ?

A joint venture (JV) refers to a business arrangement whereby two or more parties come together to carry out a project by pooling their resources together. In its most distinctive form, real estate joint ventures combine the expertise of real estate development, the financing capacity of the developer, and the contribution of the landowner in the form of land.

 

Joint venture process

Below are the steps involved in a joint venture?

Project Evaluation - The first step always involves evaluation and usually begins with a site visit by the developer to determine the property's location, accessibility, infrastructure availability, soil type, topography and other factors affecting development. The developer will then conduct a study

Feasibility to determine the best use of the property, project costs, revenues and potential returns resulting from this investment

Project Proposal - The developer will then come up with a proposal for the landowner showing the proposed concept, budget, revenue and profit sharing between the two parties

Legal Due Diligence - When a landowner accepts the developer's proposal, they are required to make use of copies of the land title and for verification by the developer's attorney. The attorney will conduct research to prove that the title deed and real title are valid and that the land is clear of any obstructions. A surveyor will then be appointed to check the signs on the ground and confirm the area at the title compared to the area on the land

, Signing Agreements - Once the required steps are completed, the developer drafts a Joint Venture Agreement (JVA) and sends it to the landowner's real estate consultant. Among the many challenges inherent in the joint venture, the agreement identifies all potential scenarios that may be a source of conflict and provides a path forward in case nothing goes according to plan. Here are some common sentences found in the JV.

Capital obligations of each party

Partnership management structure

The rights and responsibilities of each party

Exit rights and transfer rights in connection with the sale or transfer of membership rights in the joint venture.

Protecting the private aspect of the value of the land contributed by the landowner, and

Profit sharing mechanism

Both parties sign the agreement once they agree to the stipulated terms and conditions.

Formation of a Special Purpose Administration (SPV) - Upon signing of a JVA, a special purpose company is formed with the goal of achieving the objectives of the JVA. The company is then registered as a Private Limited Liability Company (LLC) or as a Private Limited Liability Partnership (LLP) by the Registrar of Companies,

Transfer of Land Title to SPV – Once the company is formed, the land owner has to make use of the Title Deed and other relevant documents required to transfer the title of the land in favor of SPV

Project Initiation - The developer then begins the implementation of the project by hiring the project team including the architect, project manager, engineers and other consultants. The developer supervises the project through to completion,

Project Completion once construction is complete, the land owner and developer share profits as per JVA terms. Shared earnings may be in the form of cash or units such as houses or apartments.

Benefits of the joint venture

Joint ventures, if done properly, can be a source of financial profit for both parties. Some of the benefits of a joint venture are as follows

Increase the capital base - In a joint venture, the partners contribute capital to the venture in the form of land and/or cash. This is beneficial considering the available capital required for real estate development. Moreover, with the initial capital, the partners are able to access loans or facilities easier because they have higher negotiating power and insurance coverage,

Development Experience - The developer on a joint venture provides development expertise in terms of concept development, design, and project management; He supervises the project until its completion. With the right partner

The land owner is exempted from the daily follow-up and supervision of the project and guarantees a professional workmanship

Access to marketing and sales channels in the market - the partnership with a reputable real estate company that was in the market ensures that the real estate product reaches the appropriate market, and thus is able to exit faster either through leasing or selling, and thus achieving returns sooner,

It can provide partial liquidity to the landowner without having to sell the entire land - In a joint venture, the landowner can get some cash exits for their land to meet their liquidity needs and also maintain interest in the development

Preferred Returns - Landowners must insist on a preferred or guaranteed minimum return to ensure that they do not lose the value of their land if the project is not realized, and

Joint Risks and Gains - Ultimately, a successful joint venture will bring the expected high returns to both partners. The partnership also makes it possible to diffuse the economic and other market risks that may result from making any ill-calculated real estate investment, which he could have borne on his own

The biggest risk and challenge in joint ventures is getting the right joint venture partner and having the right governance structure in place to manage conflicts as they arise. For investors, when you get into a joint venture, it's a good idea to define the rights and obligations of the different parties in the SPC and make sure you get separate protection for the value of the land.

 

RE/MAX ALMOHAGER Real Estate has now participated in more than 3,150 acres of joint ventures in the Capital District, Cairo, New Cairo City, Sheikh Zayed, and the North Coast. To explore the best opportunities, call 01222126844

[email protected]

https://nileestate.com/properties/participation