What is a Joint Venture?
A Joint venture (JV) is a type of development finance that offers property developers in the UK a method of financing projects without needing to use any of their own funds. A JV lender will provide all the money that is required to both purchase the land and carry out the build of the development, along with the project management costs through to completion of the project.
Profits are then shared when the site is sold, typically being split 50/50 though this can be negotiated for strong applications.
This type of development finance is considered a good option for both experienced developers and first-time developers, as well as main contractors who are looking to move into running their own developments provided they have a detailed appraisal and plan for the project.
As it is the lender who is taking all the risk with a JV, they will need to see a good return on investment when being presented with any appraisal. Typically, they will require a gross development value (GDV) of at least £1million with a margin of at least 25% to make this an attractive proposition.
Why Choose a Joint Venture?
By choosing to finance a development project via a JV, developers are able to secure the investment requirements from start to finish, without needing to raise finance or use personal funds at each phase of the project, thus allowing the developer to concentrate purely on the build and making a return upon sale.
A joint venture can be a great option for ensuring a developer does not miss out on a tender due to not having available funds, perhaps due to capital being tied up in other developments, or if they need to save their cash reserves for use in the build rather than the purchase of the land, as an example.
Key Benefits:
- Both land and build costs are fully funded by the JV partner
- No need to tie up and use any of your own funds
- Allows a developer to take on more projects meaning more profit and faster
- Significant savings on legal fees and surveys which are all taken care of as a one-stop-shop
- Profits shared can be in favour of the developer
- Expert support and advice throughout
- Quick decisions and completion in as little as 30 days
How Does a Joint Venture Work?
Joint venture development finance is effectively a temporary contractual partnership between the developer and the lender. The property or project site will be placed into what is known as a SPV (special purpose vehicle). This effectively is a limited company that is set up independently to own the assets and hold the liability.
The developer will usually be the owner of the SPV in partnership with the lender. The lender will release the funds based on the development schedule thus meaning the developer always remains in control.
Once the project has been completed, on sale of the development the profits are then divided as per the initial agreement set out in the beginning.
With a JV development loan, it is the lender taking all the financial risk, they therefore carry certain strict criteria for a developer to qualify which generally include the following:
- Main contractor or development experience preferred (or transferable skills)
- Have a project length of no more than 24 months
- Have at least outline planning permission in place
- Minimum margin of 25% on GDV
- Exit plan and the saleability of the site
To find out more about joint venture finance and this could be a viable option for you, please get in touch with one of our property finance specialists today.
