The Property Voice Podcast - Musings: Joint ventures – how they can propel your property business
Joint ventures are a hot topic in property. They can help us to accelerate the growth of our property business and that’s why they can be so appealing. Here we discuss what they are, why they are beneficial, some of the drawbacks and how we can protect ourselves in the arrangement. Listen in to hear more about the attributes of a good joint venture partnership, how to undertake due diligence and the documentation to protect ourselves.
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Resources mentioned
Property Investor Toolkit – here is the book link on amazon.co.uk & amazon.com in case you would like to get yourself a copy to accompany this series
Today’s must do’s
Consider if and how a joint venture in property can propel your business forward. Drop us a line if you want any advice on setting one up.
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
This week I have had the subject of joint ventures on my mind and so I thought I would share a few thoughts on this subject with you.
Property Chatter
OK, so joint ventures, let’s start by taking a look at what they are, why they could be appealing or beneficial and then how best to structure them to protect everyone concerned.
First of all, what is a joint venture?
I would describe it as: “Two or more parties coming together, bringing together a combination of different skills, attributes, experience, contacts and resources for mutual gain.”
A joint venture usually differs from a partnership, which is similar, as it often relates to a specific project, time-period or sub-section of your business interests.
Benefits & drawbacks of a Joint Venture
Why would we want to do a joint venture…as surely by definition that means we only get a share of the rewards instead of the entire rewards right?
Here are some of the reasons why it could be beneficial:
- Plugging our gaps in skills, experience or resources
- Sharing the workload
- Having a sounding board & accountability partner
- Gaining access to projects not possible doing it alone
- Greater ‘deal velocity’
- Generating a bigger result that doing it alone
Are there any drawbacks?
It could be said that the pie has to be divided up into smaller parts and so the project returns would need to be big enough to satisfy the needs of each party.
Similarly, some people are best suited to working alone or as the leader of a team rather than as a partner or team member. That said, in some cases, one JV partner could be more passive and so this too could be figured out.
If we don’t know the people we are getting involved with, then there could be problems of trust, or just a clash of personalities that emerge. In fact, even if we do know the people, working together on projects involving money is a business partnership that changes the nature of that relationship.
If we have not clearly documented things, then we can run into difficulties of expectation and interpretation and most of all, no real understanding of how to work out a dispute or deadlock situation.
Joint Venture Partners
So, who could, or should we partner up with?
The most common and obvious people to partner with are friends and family…people that we already know well. I have seen a number of joint ventures set up this way and that includes me with some of my friends and family. As I mentioned earlier, the business and financial relationship created by the joint venture changes the nature of the relationship with the friend or family member, so take care to discuss everything in details and then get it in writing just to avoid any problems later. Often friends and family never think they could fall out with one another, however they can and do.
The next category is probably people in your personal network. This could be work colleagues or business associates, friends of friends, fellow property investors and so on. Clearly, whilst we may know these people, often we will know them less well than friends and family. This is where due diligence comes into play. Getting to know the people we are doing business with. I will talk a little more about due diligence in a minute.
The next category could be described as everyone else in the world! People we do not have a direct connection with but we encounter or seek out in one way or another. An example may be a business angel say…someone offering finance or other inputs into businesses. Here, even more care needs to be taken to avoid the scammers and sharks out there.
Due Diligence
As for getting to know and understand one another, that is what is called due diligence. There is a term used in financial services that you may have come across, for example when applying for a mortgage with a broker…it is ‘know your client’. Here anyone involved in the financial services industry must take steps to get to know who they are dealing with. The same could be said of joint ventures, know your JV partner!
The most common steps we can take to get to know our JV partner are:
Get to know them - meet them a few times before doing business
Reputation – who do you know that knows them already or what is their public reputation if you don’t know anyone that knows them?
Experience & track record – what have they done before, do they have sample projects they can share?
Internet & social media checks – make sure you Google them and check where they hang out online to gauge their public comments and also any views aired about them
Regulation - where the partners do not already know each other as friends and family, then they need to be aware that joint ventures are now regulated if the arrangement includes some kind of profit share. This is by the FCA and the relevant regulation is PS13/3. The basic rule says, where there is no variable profit share involved then you are good to go, otherwise in order to present a JV opportunity to someone, they need to be what is called a High Net Worth or Sophisticated Investor or alternatively it needs to be a business transaction.
Lenders – mortgage and other institutional investors do not usually like a party other than themselves and the borrowers involved in the transaction. For example, should you borrow money for your deposit, they would either want the deposit funds provider to be either on the mortgage or to declare they had no interest in the property, usually by stating that the deposit funds were gifted, or secured on an alternative property.
These are just some of the steps you can take here, just remember the idea is to check that they are who they say they are.
Working with Joint Venture Partners
Next, can you work together? This usually involves exploring common goals, objectives and expectations, but equally common values, personality traits and attitude to risk.
The best joint ventures work when the parties bring complimentary attributes to the venture. Here are some of the attributes that are often brought to the JV by each partner:
- Time
- Contacts
- Skills
- Experience
- Money
There are more, however this is just to give you an idea for further thought. The point being that these joint venture to be successful will need all of these attributes to be successful. It may be the case that say 4 out of 5 of these attributes are covered by the partners but one is missing e.g. all but contacts say. This missing attribute could be covered either by another joint venture partner, or perhaps seeking out people that can bring this attribute in at a cost, or perhaps one of the partners agreeing to take on the responsibility to plug this gap themselves. In this case of a lack of contacts, they could attend networking meetings for example to meet people who can give them access to the contacts they require.
The long and short of this is to address all of the top 5 attributes mentioned between the partners and in some cases beyond.
Sometimes, partners come together that are too similar, so there are several gaps in the list noted. Here the decision has to be: is the partnership viable as it is, or what needs to be done to make it so? It may still be but there still needs to be a way to plug those missing gaps. I have seen a number of friends and family joint ventures where let’s say time and money comes together from the partners, but not necessarily the contacts, skills and experience. In these cases, the partners need to plug these significant gaps in some way or another, and as I said that could be through inviting in another partner that has these attributes, or otherwise plugging the gap through paying for them or one or more of the partners looking to add them into the mix. Experience is clearly the hardest one to plug but the partnership may take a view that they can live with that to begin with.
How to structure the Joint Venture
In terms of structuring the arrangement, there are some things to look for here:
- Joint venture agreement – this sets out the general understanding of the joint venture, such as who is involved, how the arrangement will be made in terms of roles and contribution, what is expected to be delivered, how the arrangement will be ended or exit options and what happens if things don’t go to plan.
- Declaration of trust – this is an optional agreement that can be put in place to record the beneficial ownership of a property. Whilst the JV agreement is general and can span several projects, the Declaration of Trust is specific to a single property. This may not be possible, or needs to be entered into carefully when finance is also used in the arrangement.
- Legal charge – this is where a party places a financial charge on the property and it is recorded at Land Registry, think of it like a mortgage lender who does this to prevent the property being sold without them having their mortgage balance cleared first.
- Interest at Land Registry – there are other ways to have your interests noted to protect you, such as a restriction on title transfer and / or notification if a change in ownership is sought. The idea is to prevent someone doing something with the property that you have not agreed to.
Conclusion
The subject of joint ventures is a big topic often brought up in forums and online communities as well as on the property circuit. They can most certainly help to propel your property business forward by combining the strength of two or more partners and that’s why they are so attractive.
However, they are not to be entered into lightly and equally are not suitable in all situations as might be apparent. However, with the right partners, bringing together the mix of attributes mentioned and with the right due diligence and documentation in place, they can indeed be extremely rewarding and beneficial.
This musing is not intended to be all-encompassing but it is intended to give an overview of the subject for sure, so we may well return to the topic later.
Finally, The Property Voice does work with people in joint venture arrangements on occasion and so if you would like to know more about that just drop us an email to partner@thepropertyvoice.net and we can share more about that.
Another or our summer soundbite musings in the bag then…probably a bit bigger than a soundbite, but you know me! Don’t forget that the show notes will be over at the website www.thepropertyvoice.net
But right now, all that’s left for me to say is, thank you very much for listening and until next time on The Property Voice Podcast…ciao-ciao