Investment structures for property developments: joint venture
The fourth in a series of blog posts about different ways to structure property developments that involve one or more private investors.
5 August 2021
Accessing capital is a challenge for most property developers. Banks and other lenders are probably the obvious source, but this has drawbacks. The following investment structure can reduce the need for bank lending, or even eliminate it completely.
The joint venture structure may be used when there are a small number of outside investors, or just one. Often the SPV has two classes of shares, A and B. The ‘A shares’ may be held by the developer (or by the developer’s founders or owners). The investors may hold ‘B shares’, which entitle them to the agreed share of profits.
A bank loan may not be needed. If it is, the bank will demand first charge rights.
Advantages and disadvantages of a joint venture
The fact that bank debt may not be needed at all is a big advantage of this structure. It’s also flexible, and can easily be adapted to a development’s particular circumstances. It can be tax-efficient too, as the SPV’s shareholders may benefit from Business Asset Disposal Relief or Investors’ Relief when the development is sold.
On the other hand, each investor’s terms must usually be individually negotiated, and investors will typically demand certain control rights over the SPV. This may include ‘step-in’ rights, which allow the investors to appoint a different developer if the project goes off track.
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In the next blog post we’ll look at the third of the five structures, which uses loan notes.
Key terms SPV – in order to acquire and hold property in England and Wales you usually want to use a legal vehicle. There are several different types, of which the most common is an ‘SPV’ or Special Purpose Vehicle. This is often a private company limited by shares and registered in England and Wales. In some cases – but not all – it can be a 100% subsidiary of the developer. In other words, the developer owns all the shares in the SPV.
First charge – if a lender or investor has ‘first charge’ on a property, they have the right to be repaid before any other parties that are involved. In effect, they are ‘first in the queue’, which lowers their risk. Banks typically demand first charge when lending to property developments.
Important Nothing in this blog constitutes legal advice. You should take independent legal advice before acting on any of the topics covered.