How a Property Development Joint Venture Works: Explained for Landowners and Investors

What a property development joint venture is, and what it is not

A joint venture is not a sale. If you sell land to a developer, you take a price and walk away. In a joint venture you stay in the scheme, share the risk and share the profit. The profit is usually bigger than a land price. It also arrives later, and only if the scheme works.

A joint venture is not a loan either. A lender is paid interest and fees and takes security over the site. A partner is paid from the profit, after the lender. Most schemes use both: the partners fund the equity through the joint venture, and a lender funds part of the build.

It is also not a partnership in the legal sense, or it should not be. Under the Partnership Act 1890, people carrying on a business in common with a view of profit are partners. Every partner is then jointly liable for the firm's debts.

So a joint venture that is only a handshake and a side letter can make you liable for your partner's bills. That is why most schemes run through their own vehicle.

The three common joint venture structures

Most development joint ventures take one of three shapes. The name matters less than who brings what and who carries which risk.

The first shape is the one most London landowners are offered. A vacant pub, a tired office block, a yard behind a terrace: worth more developed than sold, but the owner has no team. The developer's pitch is "keep the upside, we do the work". The right answer is "show me the numbers first".

If you are comparing this route with the alternatives, read option vs promotion agreement vs joint venture. An option gives certainty of a buyer. A promotion agreement puts you on the same side as the promoter through planning. A joint venture keeps you in for the whole scheme.

The six stages of a development joint venture

A joint venture runs through six stages. The agreement is signed at stage two, but most of the money is decided at stage one.

1. The site is appraised

Someone works out what the site can carry: how many units, what they will sell or let for, what they will cost to build. The residual is the land value. This appraisal sets the owner's contribution value and the developer's expected share. If the developer does the appraisal but will not build, treat the build cost as a guess.

2. The vehicle is set up and the agreement is signed

Heads of terms first, in plain English, then the full agreement. The site goes into a company or LLP, or the owner keeps title and grants the scheme rights over it. The terms cover contributions, the business plan, decisions, funding calls, the profit waterfall, deadlock, default and exit. Our guide to the joint venture agreement key terms explains each clause.

3. The funding is arranged

Equity from the partners, then a development loan against the site if the scheme needs one. The lender will want the appraisal, the cost plan, the programme and the planning position. It will also want to know who the contractor is and whether the contractor's price is fixed.

4. The scheme goes through planning

Pre-application advice, the application, then conditions, Section 106 and the Community Infrastructure Levy. Planning is where years can disappear. Read how long planning permission takes before you agree a long-stop date, and CIL and Section 106 explained before you agree the appraisal.

5. The scheme is built

The consented scheme is built to the cost plan the partners approved. Changes are priced before they are made. The owner receives reports and signs off anything beyond the agreed tolerances.

6. The units are sold or let and the money comes back

At exit the waterfall runs: costs and the lender first, then each partner's capital, then the profit in the agreed shares. The vehicle is wound up or rolled into the next scheme.

What the landowner signs and carries

The landowner's side of a joint venture is heavier than the pitch suggests. These are the things you sign up to, and the questions to settle before you do.

1. The site, at an agreed value. The value is fixed at the start. If the scheme does better than the appraisal, your contribution does not rise with it, only your share of the profit does. Make sure the value is tested against a sale, not just accepted.
2. The title. If the land moves into a company you are connected with, Stamp Duty Land Tax can be charged on its market value. Not on what the company pays. If you keep the title and grant rights instead, your partner will usually want a restriction on the register. That stops you selling without the partner's consent. Both routes need your tax adviser before heads of terms.
3. The waiting. Your money arrives at exit, after costs, the lender and capital. Three years is a normal wait on a London scheme. Agree what you are paid in the meantime, if anything, and whether the building's existing income stays yours.
4. The reserved matters. You keep a veto over the business plan, the budget beyond tolerances, borrowing, the planning application and the exit. Everything else runs day to day without you. Write the list down. A vague list means arguments.
5. The exit if it goes wrong. A long-stop date for planning, a right to end the venture if consent is late, and a clear statement of who pays the abortive costs. Without these, a failed scheme can tie up your site for years.

Six red flags before you sign a joint venture

A joint venture is a long relationship with someone whose interests are not yours. These are the signs that the relationship will go badly.

1. A promised return. No partner can promise what a development will make. Anyone quoting a return is promoting an investment, and under the Financial Services and Markets Act 2000 that is restricted unless the person is authorised. Walk away.
2. A standard profit split. A split quoted before the appraisal is a sales line. The shares should follow what each side puts in and the risk it carries on this scheme.
3. An appraisal with nobody's name on the build cost. If the person who priced the build will not build it, the price will move after you have committed the land.
4. Fees on the way through. A developer paid monthly management fees has been paid before the scheme has made anything. Ask how much of the partner's own money is at risk, and when.
5. No long-stop date. If planning can run forever, so can your wait. Every joint venture needs a date after which you can walk away.
6. One solicitor for both sides. However friendly the deal, you need your own. If the partner offers to cover your legal costs with their solicitor, decline.

How Craftex works in a joint venture

We are a development and construction company. Depending on the stage, we co-invest, take all of the risk, or work on a percentage or fee basis. The terms are agreed deal by deal and written down before anyone spends a pound. We run schemes from £3M to £150M gross development value, in London and the South East.

What makes our joint ventures different is that we build. Around 60% of our site labour is our own team. So the appraisal you sign is costed by the people who will pour the concrete, and there is no second price after planning. Every Craftex project has finished ahead of programme and on budget.

Two schemes that show the method

At Allitsen Road in St John's Wood, a vacant former club in a conservation area was appraised four ways. The options ran from four apartments to seven. The structural survey came first. Eighteen risks were listed with an owner against each, and a 17-month programme from technical design to keys was issued with the appraisal.

At Portsoken House in Aldgate, 1,550 sq m across two floors was converted in seven months while the other floors stayed let. That is what "your building keeps earning" means in practice.

Capital without a site

Our Development Director set up a large regeneration joint venture and was its first project director before he joined us. That experience sits on our side of the table now. We are not a fund or a broker, and we do not offer or promote investment products.

If you have capital and no site, read family office property development in London. Then talk to us about a specific scheme.

If you want a second opinion on heads of terms you have been given, send them to us. We read them against a builder's numbers. Or get a free site review first, and we will tell you whether a joint venture, an option or a sale fits your site.