Joint Venture Deal Breakers
2 years ago
Real estate joint ventures often seems to be pretty straightforward when explained to newbies. The real truth is that, there is more to JVs than usually meet the eyes
I have experienced seemingly perfect joint venture deals collapse unexpectedly and I will be sharing with you some factors that make JVs fall apart.
I have always been of the opinion that real estate developers consider land title the most important deciding factor after property location for jvs. Nemo dat quod non habet goes the latin maxim that may be translated as "you can't build something on nothing". Developers does not want to get embroiled in ownership tussels/disputes midway into a project, thus when the outcome of their title search do not prove satisfactory, they tend to prefer the safer option – pull out – to avoid stories that touch.
Oftentimes, developers request that a physical inspection of a JV property be scheduled so as to, among other things, have a feel of the neighbourhood. However, most also seize the opportunity to determine whether the facilitator is able to link them up with the landowner. Where there is too much trouble involved in accessing the property, it raises the question of credibility/genuineness of the proposed joint venture.
Some months ago, I did a series on negotiation skills. The inability of parties to reconcile their stance on certain aspects of joint venture transactions often result in one or both parties backing out of the deal. Some of the issues that parties lock horns over include:
i. Proposal /Sharing ratio: In some cases, a developer's offer may fall short of the landowner's expectation while the developer may also think that the landowner is not being realistic with his expectations.
In other instances, both parties may agree on building type(s) and number of units to be developed, however, the issue of who gets what may become a problem.
Both party's refusal to budge may be due to careful analysis of facts and figures. For instance, a feasibility study of the proposed project has revealed that the developing firm may not break even should they offer beyond a certain number of units or proportion of the project to the landowner.
The landowner on the other hand does not agree and wants more. The developer may be left with no option other than opting out if the landowner remains adamant.
Also, the landowner may be forced to take a walk where analysis of the estimated costs of development and related costs reveal that the developer's offering does not translate into a profitable transaction for the owner.
A premium may be requested for a number of reasons such as relocating the landowner, making-up for the landowner's loss of cash-flow during the construction period, etc. It may however, become contentious when the developer feels that the landowner is asking for too much. If both parties are not able to reach a consensus the deal may fall apart.
iii. Property Management: From our experience, management issues are mostly peculiar to “massive projects”. In most cases, this usually occurs when the landowner either owns/has an interest in a property management company or is a property management company prompting them to ask that their firm takes charge of managing the property at completion. While this is not always a deal breaker, it is enough for some developing firm to call a potential deal off.
Beyond these, certain other factors such as poor communication on the part of agents facilitating the deal may scuttle a JV.
Thus, facilitators have to tidy their end of the transaction by first making sure that the brief is well presented ab initio, is devoid of ambiguity and misrepresentations.
Can you think of any other joint venture deal breaker? Did we miss something out? Kindly share your views.