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How a joint venture works in property development

Wednesday, January 4, 2012 - 00:00 -- BY FRANCIS GICHUHI
Arch Francis Gichuhi (4)
Arch. Francis Gichuhi.

The
concept of joint ventures in construction of houses is relatively new in the
country. This method is however gaining popularity and works well for
properties designed for sale. For a land owner, developing it adds more value
than selling the land undeveloped. In a joint
venture, the land owner enters into an agreement with a developer, contributing
land while the latter finances the project.

The profits are then shared on a
pre-agreed ratio with the land owner usually getting over 50 per cent of the
net profits. Architects and project managers can
also agree to contribute their professional services as part of the joint venture
and get paid at the end of the project when the profits are being split up.

Locally, most land owners and
property developers are used to traditional methods of financing construction
projects which involve raising capital by either selling part of the land or
borrowing a loan from a bank or both. With the entry of the joint venture concept,
land owners are now able to finance their construction projects more easily and
affordably. This concept has numerous advantages
for a land owner.

First, the land owner reduces the risk associated with bank
loan repayments such as sudden increase in interest payments which result to project
cost escalation.

Secondly, the land owner can easily
access funds for construction since he/she will not have to undergo the
rigorous bank loan application appraisal process.

Thirdly, the owner is able to tap
resources and obtain services from consultants such as architects, engineers,
quantity surveyors without having to pay initial consultancy fees since the
consultants can offer their services as part of the joint venture contribution.

The method however has its drawbacks.
Once the construction process starts, land in the general area of the project
increases in value. This increase in value is supposed to be well-captured in
the joint venture contract so that the increase can be well-spread to all partners
including the owner, financier and consultants. This will avoid tussles such as
those recently witnessed at Suraya and one of the land owners.

Financing a JV

In Kenya, Shelter Afrique Bank finances
joint venture projects. For the projects to be eligible for financing, a feasibility
study carried out by a registered architect, quantity surveyor or valuer must
be availed. The feasibility study should show
critical minimums such as return on investment, target market and land value
ratio to the total project cost. These critical features will be used to check
if the project is viable for the joint venture. One such projects being financed by
Shelter Afrique is Everest Park along Mombasa Road, consisting 380 units. The
project cost is Sh1 billion.

Arch. Gichuhi can be reached at
www.a4architect.com