Is the joint venture agreement the new loan agreement?

Feb 3, 2025

Traditional funding model

Securing the right finance is critical to the success of any property development project. The traditional funding model for property development is a bank loan and mortgage. However, joint venture finance is rapidly emerging as a popular alternative to this model.

What is joint venture finance?

Typically, the lender and the developer form a company (JV Co) to own the property and to undertake the development. The lender and the developer are the shareholders of JV Co. The lender and the developer will enter into a joint venture agreement, which will set out how the joint venture will operate.

Funding is provided by shareholder loans from the lender, who will provide most of the funding, and the developer to JV Co. The lender will have security, such as a first ranking mortgage over the property and a charge over JV Co, for its shareholder loan.

Why is joint venture finance becoming popular?

The inherent risks in financing property developments, especially in the current economic climate, has led to the rise of non-bank lenders in the development finance space. Non-bank lenders, as opposed to institutional lenders, tend to have greater flexibility to offer alternative funding models.

Joint venture finance is attractive to non-bank lenders – their ownership stake in the development can give them greater control over their investment and can provide them with greater returns because they share in the profits of the project.

Key terms of joint venture agreements

Joint venture agreements may include terms that cover:
• funding;
• decision making;
• how interests are sold;
• sharing profits;
• dividing costs;
• managing losses;
• ownership of intellectual property; and
• dispute resolution processes.

Conclusion

Whilst traditional financing remains the cornerstone of development finance, joint venture finance is emerging as a viable alternative offering shared risk and expanded opportunities.

The advantage of the joint venture structure is that parties have greater room to negotiate and are not bound by the usual constraints of a loan agreement. However, it is important that both developers and lenders have a well drafted joint venture agreement which specifically addresses their situation and includes the key terms referred to above.

Should you need any assistance with joint venture finance for a development project, please reach out to Denise Wightman, the head of KKI’s Structured Finance and Investments team.

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