There are many ways to structure a joint venture (JV) and all will have implications on each party’s exposure to risk, funding, tax, the management of relationships, and ultimately the delivery of a scheme. It is important to consider all of the facts and options from the outset so that structures can be shaped to optimise returns and other desired outcomes, says Winckworth Sherwood’s Richard Tinham.
Joint ventures between social housing providers, developers and local authorities to bring forward new homes are becoming increasingly popular. There are three common ways in which a JV can be structured — a contractual JV, a company JV and a partnership JV, with various different approaches possible in each case.
Contractual JVs are often referenced as being the most straightforward and, therefore, more justifiable for smaller schemes but can quickly become tricky with multiple partners, particularly if one party contributes more funding than the other and wants security to protect its investment. Company JVs are rapidly falling out of favour owing to the need to prepare prescriptive articles of association and detailed shareholder agreements together with often-unfavourable taxation treatment, which prevents optimum use of such things as charitable reliefs.
Partnership JVs fall into three camps — a general partnership, limited partnerships, and the more commonly adopted limited liability partnerships. General and limited partnerships are used less often these days, as they can be costly to structure and can leave parties exposed to unnecessary risk.
Most joint ventures opt for the limited liability partnerships model for a number of reasons. As the name suggests, liability is restricted to the joint venture entity and, provided no guarantees are given, not individual partners. It is a flexible structure, accepted to be the market norm and with a high degree of tax transparency, which suits public sector organisations. Profits generated by the LLP are distributed to the joint venture partners where they are taxed in a manner consistent with their own affairs — something that registered providers with their charitable status find particularly attractive.
Funding will, quite understandably, play a major role in how a joint venture is structured. Where JV partners bring debt or bank funding, security is often involved and it naturally becomes more complex.
Funding structures need to take into account lenders’ own requirements, in particular an assignment of the development agreement and related documents and appropriate step-in provisions. Existing group funding facilities maintained by individual JV partners may also impose restrictions on the nature of the structure they wish to participate in. It is also critical that funding documentation is not negotiated in isolation, with consideration given to such things as exit provisions, S106 mortgagee in possession clauses and, of course, cross default.
Winckworth Sherwood has been involved in structuring a number of joint ventures across the UK and has seen some trends emerge.
Project specific joint venture agreements are increasingly being ‘reverse-engineered’ by JV partners to effectively create a standard form document that can be applied to future development schemes, saving time and money in reinventing the wheel on each occasion. This, however, only works where individual partners understand and trust each other’s business model.
Framework or strategic joint ventures are also popular where partners have agreed that they want to work with each other but have not yet identified a particular site. These agreements prove useful and cost effective if looking to develop out multiple sites with shared cost and risk.
Multi-phase site multiple JVs, whilst a mouthful, are also increasingly popular where a scheme is being delivered in phases, perhaps with different funding arrangements and different JV partners for each phase, depending on the nature of tenure and investment class. As many different partners are likely to be involved it is important to consider the knock-on effect on subsequent phases if there is a falling out between JV partners.
And finally, legal partnerships can be inadvertently created with unintended adverse consequences. It is important that all parties take professional advise so they fully understand the arrangements and related implications.