Commerical Real Estate

Joint Venture in Real Estate

Joint Venture is termed for a venture or a project achieved jointly or combined, a project which has been achieved by the collaboration of two or more parties. In real estate, joint venture means that a project is developed by two parties jointly. This generally happens where one party would have his land and the other party would be interested to develop a project on that land.

Some time the owner of the land could not develop it because of many reasons such as he doesn’t have the expertise or he doesn’t have the fund and likewise for the other party who want to develop might not have a land in the prime location where he can build up a nice project.

So, if these two parties join together on a mutual understanding they sign an agreement which is termed as joint venture agreement. This agreement comprises legal understand like will there be any advance or good-will money be paid by developer to land owner? Advance is the amount which a developer needs to pay to land owner which would be refunded by the land owner after completion of the project. If any problem arises while constructing, because of which they couldn’t complete the project, then that advance Amount will not be paid back.

Good-will money is the amount which a developer need to pay to land owner for developing the project and this is not refundable. This would remain with the land owner even after completion of project.

Now when the project is completed, the property will be divided between the land owner and builder, the ratio is worked out between 60-40 or 50-50 which mean that builder will keep 60% and owner will keep 40% or both will keep 50%. This division done is basis of the built up area. Built up area dependents on the site area and the road width where the site is situated, for a 30ft road width one can maximum have build up area as 1.6 times the site area, following are the regularities for different roads

30ft road 1.6

40ft road 2.0

40ft-60ft road 2.5

60ft to 100ft 3

above 100ft more than 3 and generally more than 100ft won’t be there for residential purpose

So now lets take this example to even simplify of what we have said above:-

Let take a site which is 20000 sqft and the road width is 40ft road so maximum built-up area should be 40000 sqft. Lets assume the joint venture agreement between owner and builder is fixed as 50-50 ratio and also the owner of the land get 1cr as advance. Generally the property building cost would be Rs. 1000 per sqft, so to build 40000sqft it is 40000*1000 = Rs 40000000. After completely building the apartment, the builder would get to sell his 50% share of the total 40000 sqft which is 20000 sqft. Lets assume the apartment selling rate is worked out to be Rs. 2200 per sqft, then he will earn 20000*2200= Rs. 44000000, so builder’s total earnings for this apartment will come to Rs 4000000 minus the interest rates for the 1cr advance. Let say construction take 2 yrs to complete, so builder would lose the interest for 1cr for 2 yrs, which would come around 2400000, if he takes an interest rate of 12%. So finally builder’s total earning for this property would be 40l-24l=16l which is not good for his 2 years of work.

Likewise, lets take the land owner’s point of view, Let say that the land rate is Rs 2500 per sqft so by selling land owner will get 5cr and by doing joint venture he will earn 4.4cr + the interest on 1cr which would be 4.66cr which is 34l less than what he would have got without doing Joint Venture so its not feasible. So, eventually this deal wont work out for both the land owner and builder.

All the above calculation goes into paper to decide whether to go into joint venture or not. A sample copy of joint venture agreement can be drafted with a help of lawyer.

Article Source: Jeni Relo