Mohammed Muigai LLP

Joint Ventures in Real Estate

by: Sharon Buyanzi & William Ngaruiya

Introduction

  1. A joint venture (“JV”) is a business arrangement under which two or more parties come together to undertake a project by pooling their resources together. In real estate, a joint venture typically involves a developer and an owner of land. Joint ventures with reputable developers are very key ways to tap into real estate investment benefits in a way that mitigates the risks faced by the parties.

Forms of incorporating a Joint Venture

  1. There are numerous ways of establishing a JV in Kenya, including: as a limited liability company; as a partnership; and any other business entity structure. The form of a joint venture will be suitable depending on the nature of business it is intended for. This is determined on a case-by-case basis, in most instances, an advocate would advise on the best form of joint venture.

Elements of a Joint Venture

  1. To identify a joint venture, the following are the essential elements of a Joint Venture:
  2. Community of interest in the performance of the common purpose

Under the JV, there needs to be shared goals and alignment of interests between both parties. For the success of the JV, it is imperative that the parties are aligned and have a common goal.

  1. Joint Control or Right of control

Joint control is pivotal in JVs. It ensures shared decision-making among participating entities. It manages risks collectively, aligns interests, and optimises resource allocation for efficiency. This structure fosters accountability and compliance with legal regulations while facilitating conflict resolution. Ultimately, joint control empowers partners to leverage their strengths, minimise risks, and maximise the venture’s potential for success.

  1. Right to share in the profits

In a joint venture, the right to share in profits denotes each party’s entitlement to a portion of the venture’s financial gains. This right is typically determined by the terms outlined in the joint venture agreement, reflecting each party’s initial investment, contributions, and agreed-upon profit-sharing ratios. It ensures fairness and equity among the venturing entities, motivating collaboration and alignment of interests. The profit-sharing arrangement may vary depending on factors such as capital investment, expertise, resources, and risks undertaken by each party. Ultimately, the right to share in profits incentivizes parties to actively participate in the joint venture’s success and rewards their contributions accordingly.

  1. Joint proprietary interest in the subject matter

Having a shared proprietary stake in the subject matter of a joint venture is crucial for several reasons. Firstly, it ensures that all participating entities are invested in the venture’s success, fostering a sense of dedication and mutual obligation. Secondly, joint ownership encourages collaboration and teamwork, as each party is driven to safeguard and improve the value of the shared assets or intellectual property. This alignment of interests helps prevent conflicts and disagreements over ownership or control of the subject matter. Moreover, shared proprietary interest supports the venture’s long-term viability by facilitating strategic planning and investment, as all parties have a vested interest in the venture’s advancement and profitability. Overall, possessing joint proprietary interest in the subject matter strengthens the joint venture’s groundwork, promoting trust, cooperation, and collective progress

  1. Duty to share in losses incurred

This obligation signifies that each party is accountable for its proportionate share of any financial setbacks or liabilities incurred by the venture. It serves to distribute the burden of losses fairly and equitably, reflecting the initial investment, contributions, and agreed-upon sharing ratios outlined in the joint venture agreement. By sharing losses, parties demonstrate their commitment to the venture’s objectives and their willingness to bear the risks associated with the partnership. This duty promotes transparency, accountability, and trust among venturing entities, fostering a collaborative environment conducive to overcoming challenges and achieving long-term success.

Benefits of Joint Ventures in Real Estate

  1. Joint Ventures in the real estate offer numerous advantages. Some of the advantages include:
    1. Risk Sharing: Joint ventures in real estate allow parties to pool resources, capital, and expertise, thereby spreading financial risks across multiple stakeholders. By sharing the burden of investment and development costs, participants can mitigate individual exposure to market fluctuations, regulatory changes, and project-specific risks.
    2. Access to Expertise and Networks: Collaborating in a joint venture provides access to diverse skill sets, knowledge, and networks. Partners bring unique strengths, such as construction expertise, property management experience, or local market insights, enhancing the venture’s capabilities to identify opportunities, navigate challenges, and maximise returns.
    3. Scale and Efficiency: Joint ventures enable participants to undertake larger and more complex real estate projects than they could individually. Pooling resources and combining efforts can result in economies of scale, cost efficiencies, and faster project execution. Moreover, shared access to financing sources and negotiation power with suppliers and contractors can lead to improved project economics and competitiveness in the market.

Challenges faced by Joint Ventures in Real Estate

  1. Nothing comes without its downsides. The following are the possible challenges that can be faced in a real estate joint venture:
  2. Divergent Goals: When partners’ objectives don’t align, conflicts can arise regarding project direction, investment approaches, or exit plans. Discrepancies in risk tolerance, expected returns, or management approaches may exacerbate these issues.
  3. Legal and Regulatory Challenges: Navigating legal and regulatory landscapes, including zoning laws and tax obligations, poses complexities. Non-compliance or differing interpretations of contractual terms can lead to disputes, fines, or project setbacks.
  4. Resource Allocation Disputes: Disagreements over unequal contributions or resource distribution among partners can strain relationships. Contentions regarding funding commitments, asset valuations, or required efforts may undermine trust and cooperation.

Structuring the Joint Venture

  1. Structuring a joint venture (JV) requires careful planning and consideration to ensure the success and longevity of the partnership. Here’s a breakdown of key steps and considerations in structuring a JV:
  2. Define Objectives and Scope: Begin by clearly defining the objectives of the joint venture and the scope of the partnership. What are the goals both parties aim to achieve? What resources will be pooled together, and what activities will be undertaken jointly?
  3. Identify Partners: In choosing the right partner, it is important that one undertakes due diligence on the proposed partners to the joint venture. Assess potential partners based on their expertise, resources, market presence, and compatibility with your organisation’s culture and values. Choose partners whose strengths complement each other and align with the objectives of the venture.
  4. Choosing the legal structure and legal governance: It is imperative that one considers the legal structure that the joint venture will take and how the tax implications will be shared or borne by the respective parties.
  5. Resource Allocation: It is important that it defines how resources, including financial capital, intellectual property, and human capital, will be allocated and utilised within the joint venture. There should be clear guidelines for resource sharing, investment decisions, and risk management to optimize efficiency and mitigate conflicts within the joint venture.

Drafting the Joint Venture Agreement

  1. In drafting a joint venture agreement, the following are the key areas that you should look out for:
  2. It must clearly outline the rights and obligations of each party- this is important as it should clearly demarcate, what each party is entitled to and how their obligations arise and how they are to be split amongst the parties.
  3. Confidentiality, non-compete and intellectual property clauses are equally important as they will go to protect the assets of each party in the Joint Venture.
  4. The joint venture agreement should contain a fair and valid dispute resolution clause, for instance, the clause could propose the use of negotiation or arbitration once a dispute arises.
  5. It should have a clearly stated duration and termination clause, to ensure that it is not left to chance as to how and when the joint venture is to be terminated.

Conclusion

  1. Joint Ventures in real estate are a booming concept and one of the ideal ways to invest in real estate in Kenya. Investing through a joint venture, has numerous benefits and an ideal way to share risks and profits, it is however critical to note the pitfalls one may face when entering into a real estate joint venture.