As more Kenyans seek ways of owning property, joint venture agreements are becoming increasingly popular. Joint ventures are agreements between land owners and investors that aim at developing real estate property.
To find out how the arrangements work, ALAN OLINGO spoke to conveyance advocate Ms Muthoni Kamau, who listed the steps involved as follows:
First, the land owner takes the investor to the proposed site for the investor and his team to inspect it and establish the viability of undertaking a project on it. The factors they consider include the infrastructure, size and shape of the land, ground level, neighbourhood, area zoning and proximity to basic amenities.
This enables the investor to determine the most appropriate type of development for that particular parcel of land, that is, whether it is suitable for residential apartments, town houses or perhaps even a commercial building.
After visiting the site and coming up with a raw concept of the nature of development to be undertaken, the investor makes a proposal to the land owner, which in most cases consists of a offering a percentage of the built-up area to the land owner towards the cost of the land, and profits. This is arrived at after taking into account factors such as the cost of the land, the cost of construction, escalation in cost of construction, the cost of obtaining approvals for the project, legal, marketing and administrative expenses, and the selling price of the units in the project (cost- benefit analysis).
Land owners who do not want to get involved in the day-to-day running of the project, or to be responsible for any losses associated with the project, prefer this arrangement. The land owner is free to dispose of the constructed property delivered to him/her under the joint development agreement, to retain his/her share of the built-up area, or to sell it at a later stage without the investor’s involvement. The remaining built-up areas, apartments or houses are allocated to the investor.
The proposal can also be in the form of returns and profit-sharing ratio between the parties, depending on the agreed contribution by each side.
If the land owner accepts the investor’s proposal, they can start the formalities of drafting the main agreement, and the land owner avails copies of the title documents for verification by the investor’s advocate.
Once the investor’s advocate approves the title, the advocate makes a draft copy of the joint development contract, laying down the terms and conditions of the development and operation(s) therein, and presents it to the land owner for approval.
If everything is okay, the contract is signed by both parties, stamped, and in most cases registered under the Registration of Documents at the Ministry of Lands.
Once the joint venture agreement has been signed, a special-purpose company is formed, with the singular aim of fulfilling the obligations and intent of the joint venture agreement. The new company formed should, ideally, be registered as a private limited company under the Companies Act under the Laws of Kenya.
In line with the joint venture contract, the land owner avails to the investor’s advocate all deeds and relevant documents to faciliate the registration of the transfer of the land in favour of/ in the name of the JVC.
By this time- the contractor and consultancy team for the project will have been formally appointed. The investor will have the plan prepared by the project architect, taking into account the land owner’s requirements, and when ready and approved by the landowner, the same will be submitted to the relevant government authorities for approval.
In most cases, the terms of the joint venture agreement stipulate that all the procedures, formalities and cost of approvals be catered for by the investor. Once the approval of the relevant bodies has been received, work can begin and adverts placed indicating the availability of units in the project for sale.
On completion of the project, the built area/ houses allocated to the landowner are handed over to him/her. The landowner is free to sell any of the houses allocated to him/her at any stage of the construction, or even after completion. The formula for sharing profits will have been negotiated and agreed upon before the signing of the agreement, which clearly spells out the terms.
As more Kenyans seek ways of owning property, joint venture agreements are becoming increasingly popular. Joint ventures are agreements between land owners and investors that aim at developing real estate property. PHOTO | NATION
1. Access to expertise, more resources and finance
Many land/property owners with underused properties, or run-down buildings or undeveloped parcels of land have limited resources and, therefore, cannot develop them themselves. By entering into joint venture agreements with stronger, more established partners, such people can derive a lot more from their properties/land.
Critical intellectual property and technology are among the resources that are often difficult to build in-house, so by entering into joint ventures with companies that have these resources, land owners can get access to such assets..
In most instances, the investor has the technical expertise and finance that the land owner requires to successfully develop, market and sell the project. Therefore, coming together in such ventures affords each party access to the other party’s resources for free. Financial institutions are also more likely to fund a project in which a well-known company (investor) with a good track record is involved rather than one undertaken by a new entity. Land owners also benefit in that they do not pay interest on bank loans since, as joint venture partners, most investors will provide equity financing.
Where a land owner in the real estate industry partners with an investor in the same field, they can reach a wider market than they would individually. This is because they can combine and expand their sales forces and target market, resulting in larger, more diversified revenue channels.
Joint ventures often enable growth without the land owner having to inject additional funds or look for outside investors. The parties can see each other’s customer database to market the project and their properties, and offer each other’s services and products to their existing clients. Joint venture partners can also benefit jointly buying what they need, research and development.
Typically, a JVC is valid for the duration of the project. However, during its validity, the participating parties do not have to cede control of their businesses to the company they form entity, nor do they have to stop ongoing operations. Each company can maintain its identity and return to normal business once the joint venture is complete.
It is common for joint ventures to be between large organisations and much younger/smaller companies or individuals who own the land but do not operate in the real estate field. By collaborating with an established company, land owners not only gain from the expertise of these companies, but also increase their credibility in the eyes of the public and potential buyers.
Many land owners who are young or new entrants in the real estate business will ordinarily struggle to build market credibility required to form a strong customer base. Entering into a joint venture arrangement with a well-known brand helps establish credibility, enabling them to engage with big players in the real estate industry, which is difficult to establish as an individual.
5. Expertise, experience and knowledge gain
For land owners who are new in the real estate industry, acquiring the knowledge and expertise necessary to operate in this market is time-consuming and costly. Partnering with established companies that have the relevant expertise required for entering target markets can allow such land owners to reduce the time it would otherwise take to develop the expertise. During the execution of the joint venture, the land owners are exposed to the specialised expertise and knowledge by the investor and his team of experts and can learn from them.
Joint ventures also have the benefit of shared risk among the parties. Undertaking a new development as an individual land owner carries a huge of risk, which many people cannot bear alone. Under a joint venture arrangement, the parties pool resources, reducing the burden of getting finances and making the requisite technical expertise less of a challenge. The risk of the project failing and having a negative impact on profitability is lower because the costs associated with the project are distributed between the parties. When a joint venture is successful, the parties share the profits as agreed. Similarly when a joint venture fails, every party bears its portion of losses.
There are instances where a land owner might wish to develop his/her land, and in addition to the lack of funds and required technical expertise, their lands is also encumbered e.g by loans, unpaid lands rates, etc. Joint Venture arrangements have seen many such properties rescued from imminent auctioning by investors who come in and shoulder/clear the encumbrances.
