JV / Profit Share Development

Hi all,

I'm looking at investingin in a JV / profit share opportunity on a commercial project.

The property developers raises capital from investors to fund ~40% of the project (mostly the land acquisition side) and then they get a bank loan for the remaining ~60% (mostly the construction costs).

The properties are sold on project completion and profit is shared between the developers & investors.

The numbers are pretty attractive. The model suits my current situation as I have some capital sitting there (and I don't want to get loan for my own property).

What are some pitfalls of this model and what are things to look out for?

Obviously project track record is key for the property developers, anything else?

Thanks!

 

Who's guaranteeing the loan? Hopefully not you.

There's a very long list of "could happen" and maybe some new ones.
Unless you know these people well I would be very weary.

I like the loan numbers to be the other way around. Max 40% loan. Less is better.
I'd look at increasing invested capital from parties involved.
Be very conservative on returns and add 20% to all expenses, take 20% off est profits.

How many of these have they done before? Verify the DAs on the council website.

 

Thanks! I think the property developers are guaranteeing the loan. It's a no-deal for me if there is any risk to my side aside from the capital I invest.

I'm stil yet to see the contract though, and I'm posting on here to try and find out what questions I should be asking them and the best way to go about doing my due diligence.

This would be my first JV deal.

Thanks for the advice on checking for DAs. Anything else?

What sort of lawyer would review this type of contract? Would it be just a regular conveyencor?

I don't have a say in how much capital they raise. They've decided on ~40% / ~60%

 

Way too many pitfalls - most highlighted in the above post by @Piston_Broke however seems like it's 100% funded externally which is a big worry, given it will be layered on and on and on with first/ second/ third charges/ security - If the developer has no equity (skin in the game), the lending will be on astronomical rates and diving this deep in a commercial world on a JV is for fools or seriously-experienced folks.

If you haven't undertaken commercial or resi dev yourself, you might be better off to do a resi dev first (something small) and understand the process as a 'lived-experience' before going all in with rose-coloured glasses.

I have a single JV in my prop investment journey and even with the most understanding 3 partners (inc myself) on a potentially very large dev block in a cap city with mouth-watering numbers, it hasn't even started off the ground (was meant to finish 2019) and been sitting with lawyers for years now! Just too complex and with a JV partner's divorce and another partner's SPV in liquidation (un-related to the project), it cannot be built and it cannot be sold currently - too messy. Even though we own the land with clear title..

I would say - don't do it! but that's the risk-averse side of me..

 

how will your funds be contributed and who to and what is the security?

 

Thanks all,

I'm also in the midst of a small resi (duplex) project. That's why I don't want to start another project myself.

I'm just looking at investing additional capital I hold within my Pty Ltd company in a high return investment (at least higher than what I get through my bank).

There will be two entities involved in the project. The 'developers entity' (entity 1) and the JV partners entity (entity 2).

JV partners entity is Pty Ltd company and the partners own shares proportional to the amount invested.

The developers hold a separate entity and the land is held in this entity. The construction loan is funded through the developers entity (so I guess then the developers are the ones who guarantee the loan).

As I understand the reason why there is two entities involved is because this way it's the developers who submit their paperwork for the loan. Suppoedly they have the track record and security to be able to acquire funds at attractive rates.

So, whilst they don't have skin in the game, I guess they are the ones exposed to any losses incurred given the entity that they own is exposed to the loan.

The transaction of funds is managed through an independent trust account with an agreement in place.

 

I wouldnt touch "mezzanine finance" with a barge pole if I didnt know the person very well. You are lender of last resort perhaps to someone with no skills at delivery and as a unsecured creditor may be last one standing. I have seen too many do this and get burned. Even well known builders. They know it costs $100K to sue someone. For $100K... And they do it time after time.

You are a lender of last resort. If a mainstream lender wont touch them - why ?

Very different to a unit trust style project where all profit share is fixed. How does a company pay a share of profit ? It doesnt have to pay a dividend if its a company. You cant demand it. And what exactly is "profit" ? Who calculated that ? Its easy for one party to load costs and then reap profit elsewhere you cant share in. And what happens if its a loss ?. Developments dont always make profit.

 

Thanks for the advice.

Are there other profit share / JV investment type structures that might be more suitable / less risky then?

Concisous that I'm not interested in getting another loan myself, and I have captial of up to $100k that I'm willing to risk. I don't know of many options in property aside from REITs. Are there any?

I don't know anyone in the industry 'well', so any opportunity would need to rely on the contract.

 

@TomNewbie you would do well to read this thread Sasha Hopkins and the "A Team Property Group"

It outlines how JV/profit sharing deals can be a lot of smoke and mirrors with the investors left holding $0 . There are some legit ones but the reason why the returns are so attractive is generally because the risk is not so attractive.

 

Thank you Westminster!!! This isn't the company I'm looking at but it's good background info.

 

Yup I wasn't suggesting it was the same but it will give you some insight into how your money could be on-lent to another company outside of your control etc.

 

Whilst there are obviously a lot of sharks and I need to be careful, there must be some good JV opportunities also.

Aside from track record, how can I pick the good JV deals from the bad ones? From a numbers and a track record perspective the one I'm looking at looks great, but I want to be careful.

 

You don't know what model it is, you haven't even seen a contract.

I know plenty developers with a good track record. None of them would ever be in need of 100k.
Many of them do JVs with friends and people they know and worked with for along time. They like the social aspect. Many of them drive old Mitsubishi utes.

Maybe this threadcan help
Unlisted Property Trusts 2021 [Property & Infrastructure Funds]
[/QUOTE]

JVs shuold be as simple as posible.
At the very basics it's like A and B put in $500k to buy Park Lane & Mayfair and build a red hotel.
Est build end cost is 1mil, any cost overuns can be borrowed using the IP as collateral.
Seems simple.
Then just before the end when an extra 100k is needed to finish the project
One of them gets divorced and is served court papers the ex wife is claiming half.
Or one of them is part of bankruptcy preoceedings and liquidators now control his half.
The daughter Amy has to go to rehab and 70 days is quite expensive. He want his share back.
Your partner has disappeared, last seen at Heartattack and Vine.
Your partner did'nt pay the concreter and lost the money at the casino, concreter put a caveat on your property which you find just before settlement.
Your partner had his share of the funds in an accountants trust fund...accountant is now in remand for diddling with trust funds.
blah blah blah etc etc etc

Some may be reading this thinking "he's more piston than broke tonight" other with some experience will be having flashbacks of terror...

"JV structure", "deals" has nothing to with it, JVs are about the people involved.
You should seek legal advice from a commercial lawyer or appropriate person.

 

Thanks for all this info!! Some helpful stuff to read through.

 

I seeing this....Developer is looking for some investors whom buy a land for him. Then he will go to lender who use your (investors) land as security. If he ballyup during the process your land is gone and you may be liable for outstanding loan. Then he will build and keep his construction margin on higher end to earn more money (fixed income regardless of individual units sold with profit or loss).

How capital gain will be calculated, GST, who will pay land during construction, so many issues