Joint Venture financing for construction projects is a process where the land owner contributes their land and a financier is sought to bring in construction finances then the two parties share the profits at an agreed percentage based on their mutual agreement.
Shorter time to bring in profits.
Joint venture construction projects enable the land owners to bring in profits to their property within a shorter time compared to developing on their own without financiers. Land on its own doesn’t bring in income no matter how high its valued. Land becomes income generating when used eg for agriculture, real estate etc.Joint venture financing works well for lands located in prime areas around Nairobi where real estate income is high. A land owner can reap maximum profits if they developed their land fully, building vertically upwards to as many storeys as the market can be able to take. In Nairobi CBD, Westlands, Upper Hill, etc we now have buildings over 40 storeys, most being developed through the joint venture financing method.
Maximum utilisation of land for higher profits.
A land owner on their own will be limited financially to develop their land to the maximum , hence reaping lower profits due to the low rise and low density utilization of their land. With joint venture financing, they can easily develop their land to the maximum and get higher profits.
For example, a 1.6 acre land along Rhapta Road, Westlands, valued at kes 700m, can bring in kes 1.9 billion to the land owner through the joint venture financing method within 3 years. Any other way to bring in income by the land owner using the land will fall short of this. If the land owner decides to sell, they can only get kes 700m. If they decide to develop, the financing of 20 storeys, costing kes 2 billion will be a tall order for an individual land owner. If they decide to build a few apartments and rent, the total rental income will be low. Only a joint venture option can be able to increase their net property value to kes 1.9 billion within such a short time.
zero percent contribution.
The land owner contributes only the land, with no requirement for any other contribution. With such conditions, joint venture financing enable the land owner to increase their property value with very low capital requirements unlike other methods eg borrowing from banks and selling. The complications of hiring architects, quantity surveyors, engineers etc and supervising contractors is also removed in joint venture financing deals since the financier can come with this team.
A limited liability company special purpose vehicle is formed between the land owner and the financier where the financier owns a percentage of shares as agreed upon between him and the land owner, for example, 70% vs 30%.
The land owner and financier enters into negotiations to determine the percentage of profit sharing until they come up to an agreement. The percentage is normally within the range of 20 to 40% for the land owner and the rest for the financier.
The financier’s percentage includes the finances that go into actual cost of construction.
Charge on property.
Most financiers end up charging the land title deed to commercial banks for loans. The cost of financing, bank interest, should be totaled up to the total cost of construction financing such that the land owner and financier share the profits after the cost of financing has been included and totaled up with other costs of constructing. In case more financing than anticipated is required, the cost of the additional financing should be added up towards the total cost of construction. The profit is derived after all inputs into he construction are added up and the units sold to the public, with the remainder as profit. A good return on investment should be at the minimum of 23.5%.
Sourcing joint venture financiers.
Financiers for joint venture should have a proven track record of completing their projects to satisfaction between them and the land owners. Proof of financial capability is crucial in enabling the land owner to feel comfortable and confident to move on with negotiations and transfer their land to the joint company special purpose vehicle formed for the joint venture. a4architect.com has a list of joint venture financiers who have successfully completed projects around Nairobi of a similar nature. a4architect.com also lists land owners seeking to negotiate with financiers on joint venture partnerships.
See the Joint Venture land list here.
a4architect.com facilitates the negotiations and offers Architecture design and construction Project Management services towards the joint venture projects for successful completion.
4th Ngong Avenue towers.
Everest Park Apartments, Athi River.
Sifa towers, Nairobi.
Belcrest court, South B.
Architect Francis Gichuhi kamau.