JOINT VENTURES FOR CONSTRUCTION PROJECTS IN KENYA.
1. How does the JV work?
A Joint Venture works whereby a land owner does not have the requisite funding enabling him obtain financing from a bank. In most cases, banks require that the land owner fund approximately 30% of the total cost of the project including land and consultancy fees.
Where the cost of land is less than 30% of the total costs, banks require that the land owner top up the difference either using cash or construction input till foundation stage. This top up is what lacks to most land owners. Joint Venture partners come in to assist the land owner reach the required bank minimum of 30% contribution by the land owner.
2. What is the role of the Land owner in JV?
The land owners role in a JV is to avail clean land that has no encumbrances. The Land owner will need to employ consultants who will be able to negotiate with him for a good deal with the JV partner. In most cases, the Joint Venture partner takes a minimum of 51% of the total profits regardless of the contribution.
For example, say the value of the land is 15% of the total construction project cost. The Joint venture partner puts in the other 15% in form of cash so as to reach the minimum bank lending threshold of 30%. In a good Joint Venture negotiation, the Land owner should be able to get the majority percentage of profits even through the contribution between him and the Joint Venture partner is the same.
3. What would be the land owners contribution?
The land owners contribution is clean unencumbered land. We at www.a4architect.com can team up with the land owner to provide consultancy services, namely architectural, structural, quantity surveying, project management. This will push up the land owners contribution so as to enable a better Joint Venture negotiation deal.
4. What is the land owners benefit?
Once construction is through and the property sold, the land owner stands to gain form at least 51% of the profits from the proceeds . Profit is what remains after all costs of construction are added up together. The major costs to construction are
2.Statutory fees to Local Authority and N.E.M.A
4.External works construction eg roads, septic tank, bore hole, fence
5. Architectural, Quantity surveying, engineering, legal and project management fees.
6. Sales agents commissions and advertisement/marketing costs.
7. Bank loan interest repayments.
5. Who is the Joint Venture financier?
Joint Venture financiers are usually local banks. Once the land owner agrees with the Joint Venture partner in terms of the contribution, the Joint Venture partner together with the land owner register a company with each having commensurate percentage of ownership e.g. if they agree on 60 % vs. 40%, then the company ownership will suggest the same. The land owner then transfers the land title to the company.
This means that the land is now co owned the the original land owner together with the potential Joint Venture partner. With the co owned land, they both apply for a construction loan from a bank.
The bank charges the land title as collateral and releases the construction funds. Once construction is through, the original land owner and Joint Venture partner share the profits as per the company registration and the company is finally dissolved.
Francis Gichuhi Kamau, Architect.