Bank Loans for Real Estate Vs Joint Venture Property Development.

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Bank Loans and Joint Ventures. Which option?

Real estate projects are capital intensive. Fact!

Real estate investors, property developers and property owners sometimes are faced with a lack of funds to execute. They need to know how to raise money for real estate development in Nigeria

One option for real estate development finance is to borrow. In this case we speak specifically to borrowing from one of the many Banks and financial institutions in Nigeria. Loans could also be taken from private individuals, or cooperatives, but we will not speak to this because the loan terms are not public and could vary significantly.

Another Alternative could be entering Joint Venture (JV) partnerships.

A joint venture is an arrangement in which different parties (partners) agree to pool resources at their disposal together to augment the limitation/deficiency They have, in a bid to achieve a common goal that would have been otherwise out of their individual reach.

Taking a Loan from Nigerian Financial Institutions

What are the types of loans for real estate developers?

Secured Loan: A secured loan is one in which the borrower is required to pledge assets as a precondition to taking out the loan. Sometimes referred to as collateral loans, the collateral (asset) in these kind of loan transactions are usually worth more than the borrowed sum and can be claimed by the creditor if the borrower breaches the agreed terms and conditions of the loan. A popular example of a secured loan is a Mortgage Loan.

Unsecured Loan: An unsecured loan is a loan in which a borrower is not required to pledge an asset as a precondition for obtaining such loan. Considering that there is no collateral on which the lender can “fall-back” to, this type of loan commands a higher interest rate compared to secured loans. Unsecured loans are very hard to get in Nigeria.

Here’s an idea of terms to get a loan from real estate financiers in Nigeria

Pros and Cons of Loans 

Below is a table highlighting some merits and demerits of obtaining loans for real estate development:

 

How do Bank Loans Weigh up against real estate JVs?

Joint Venture Models

Real estate JV’s can be structured in a variety of ways, some of the most widely used models include:

Build Sell all and share profits:

As the name suggest, this kind of JV partnership is hinged on the understanding that after resources contributed by participating partners to such deal has been successfully utilized and the collective goal, which in this case is the construction/development of real property, the property is put on the market and the proceeds of the sale shared at an initially agreed ratio among the participating partners.

Build Operate and transfer:

In the case of a Build Operate and Transfer arrangement, parties to the JV deal, usually land/property owner(s) and Developers/investors/financiers enter into an agreement where the latter either finances or oversees the development/redevelopment or renovation of the former’s property and at completion take possession of the property for a specified period of time after which he surrenders possession of the property to the land/property owner(s).The idea here is that, the developer/investor gets to use the agreed tenure to recoup the capital expended as well as make additional profit, usually by leasing out the property.

Build, Share buildings/units and Occupy or rent out:

In this unique scenario, the understanding between participation partners is such that, each member contributes a mutually agreed quota to the development/redevelopment or renovation of the subject property involved in the deal. However, unlike in the preceding models, each party to the deal gets a pre-agreed portion of the completed project with partners having the option to either occupy”, lease/rent out or even sell their “share of the property.

Pros and cons of Joint Ventures

 

Below is a table highlighting some merits and demerits of getting into a Joint venture for real estate development.

 

Which is Better Joint Venture or Bank Loan? 

To be honest we don’t think one option is better than the other. What really makes the difference is knowledge of the potential, risks and advantages of each approach.

Joint ventures provide cheaper access to funding, particularly in Nigeria where the Bank lending rate is high, but if one lacks good people skills and negotiating skills, joint ventures could turn out bad and result in conflicts between partners

The critical thing is for the individual to assess their strengths and weaknesses in these key areas:-

1.    Ability to secure Bank funding at a favourable rate

2.    Potential of the project to pay interest charges on loans and still be profitable

3.    Skill level and knowledge in dealing with third parties to ensure successful delivery

4.    Understanding of Joint Venture partnerships – Pros, Cons and legal contracts

Once you can honestly assess yourself in these areas you will know which option to take.

The most critical thing is to definitely take action. There will always be risks in life and inaction should not be an option

JV Pulse Ltd helps to connect property devlopers and property owners to form collaborative partnerships for property development.

 

Cheers!