Joint ventures between social housing providers and developers to bring forward new homes is now commonplace. Yet there are many ways to structure a JV and all will have implications on funding, tax, the management of relationships, and ultimately the delivery of a scheme. It is important to consider all of the facts from the outset so that structures can be shaped to optimise returns and other desired outcomes.
Richard Tinham, Head of the Corporate and Commercial team gave over 90 developers and registered providers an insight on how to get off on the right foot, funding implications and an overview of how the structuring of JVs is changing.
The seminar opened with a reminder of the three common ways in which a JV is often structured – a contractual JV, a company JV and a partnership JV.
Contractual JVs are often referenced as being the most straightforward but can quickly become tricky with multiple partners, if one party contributes more funding than the other or in situations where security is given. Company JVs are rapidly falling out of favour with the need for prescriptive articles of association and detailed shareholder agreements; and often unhelpful taxation.
Partnership JVs fall into three camps – a general partnership, limited partnerships and the more commonly adopted limited liability partnerships. General partnerships are rarely used and can leave parties exposed to unnecessary risk. Seminar delegates were warned that it is possible to inadvertently create a general partnership JV as no formal documentation is needed. Limited partnerships are rarely adopted as they are complex and costly to structure.
Limited liability partnerships prove popular for a number of reasons. As the name suggests, liability is restricted to the joint venture entity and not individual partners. It is a flexible structure with a high degree of tax transparency; profits return to the joint venture partners and are taxed in a manner consistent with their own affairs – something that registered providers with their charitable status find particularly attractive.
What shapes a joint venture?
There are, delegates were told, many factors and considerations that will influence that shape of a joint venture. These will typically include:
- Ownership of the land and constraints on transfer.
- Skills and resources of JV partners. For example, if one party brings planning or construction expertise this will need to be formalised in a management agreement.
- Funding strategies.
- Financial and balance sheet constraints of individual JV partners.
- Attitudes towards risk.
- Taxation on set-up, operation and on gains. SDLT and VAT recoverability will also be considerations.
- Procurement, particularly if local authorities and registered providers need to consider OJEU rules.
- Overall costs.
- And timing.
Funding will, quite understandable, play a major role in how a joint venture is structured. Where JV partners bring debt or bank funding it will naturally become more complex.
An early consideration will be the balance between simplicity and flexibility. Be wary of on-demand facilities as the lender can call in its debt at any time with no reason.
Funding structures need to take into account the lenders own requirements and its assignment of security and step-in provisions. Existing funding requirements with individual JV partners may also impose restrictions.
It is also critical that funding documentation is not negotiated in isolation, with consideration given to exit provisions, S106 mortgages in procession clauses and, of course, cross default.
Our Corporate and Commercial team has been involved in structuring joint ventures that are delivering some of the largest residential developments in London, the South East and nationally. A number of interesting trends are emerging.
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. This, however, will only work 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.
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. 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.
Where consortium bids are required, a JV within a JV that separates the consortium from development partners is increasingly common.
And finally, a number of clear funding trends are emerging. Multi-phase sites are proving particularly popular with lenders, as is development finance on standard terms with no option for negotiation. HCA and GLA funding also leave limited scope for negotiation and their default events can be quite wide.
And on occasion registered providers will act as lenders, but it is important to ask why. If other lenders have turned down finance it may be unfundable and a registered provider should exercise caution.