Secondly a special committee is formed to oversee the project, this includes people from both parties, and a chairperson for the committee is appointed and remains neutral. The real estate agency oversees the project since they are the developers and hence have resources relevant to the venture. The real estate should get returns of 15% or even more. Sharing of profits is equivalent to the shares of each party. The developer is first paid 15% and after that the remaining amount is shared between the two parties.
It can either be contractual or corporate. In contractual the two parties work together and document their working relationship while in corporate they form a corporate entity which can be in form of a company or a limited liability partnership in order to pursue a common interest. Parties prefer corporate because the land can be held in a special purpose vehicle where the partners are also shareholders. Risks and losses are shared equally while profits are shared depending on the contribution of each party.
Drawbacks facing joint ventures include misalignment of purposes.The agreement should address decision making, mode of reporting, disclosure requirement and ensure transparency at all times.The lifetime of the joint venture can be lifelong or can be stipulated by the amount of time that the two venturers agreed upon.
Upon completion of the agreed time party A in agreement with the other venturer can either agree to buy out or sell out. The parties can choose to sell out if the venture is no longer productive in terms of profit as when it started, secondly they can choose to buy the whole land if the accrued benefits are constantly increasing or renew the joint venture contract
Joint ventures have vast sources of Finances. This can be done through borrowing from financial institutions such as banks or from other accredited money lending agencies, investments from the agencies, directors’ investments, and deposits from rent income and also from other investors.
CONDITIONS/ REQUIREMENTS TO DRAFT AN AGREEMENT
- Planning; the scope of the Joint Venture, The purpose
- Form of Joint V- The kind of ownership.
- Regulatory- identifying current and anticipated changes, mode of operation and exit strategy
- Implication of JV on existing operations and reporting requirements- financial, management
- Tax considerations
- Internal preparations
- Confidentiality agreement
- Letter of intent- it can be binding or non binding
- Asses your needs-
- Focus on finding a good fit
DRAFTING THE AGREEMENT
- Introduction section- name of parties entering into the agreement, specific objectives and responsibilities
- Provide important definitions – agreed terms provide clarity to your document
- State the business objectives of the joint venture- provisions provide the scope and purpose of the agreement hence help both parties in understanding the expectations
- Explain the joint venture governance structure- governing body and management
- Lay out what each party will contribute- something of value from both parties will lead to a binding agreement. This can be through carrying out a SWOT analysis of each party.
- Determine how profits, losses and liabilities will be shared- mayor not be shared equally
- Create dispute resolution provisions
- Draft exit and termination procedures