Buyers should be cautious about joint ventures in real estate

[] As with any joint venture, JVs between developers, or those between developers and landowners, sometimes have contentious issues that buyers should be aware of

Joint ventures (JVs), in the real estate sector, typically, take place between two developers or between a developer and a land owner. As in any partnership, conflicts may arise in these JVs, which could harm the buyer’s interests.

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Builder-builder JV

In a JV between two builders, the common bone of contention is the profit-sharing mechanism. As both partners are engaged in the same business, they know how much capital is required and what returns can be earned on it. Nonetheless, there is jockeying to get the better of each other.

Builder-land owner JV

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In this JV, the land owner contributes the land, while the builder undertakes the development and marketing. Disputes, in this case, may be of a different nature. Jaskirat Singh Bansal, MD of New Delhi-based real estate consultancy, Good Homez, recounts an instance that he was witness to, in Mohali. “The builder advanced a token amount to the land owner and then conducted a due diligence. This revealed that the land owner had the title to only four of the 10 acres. When questioned, the latter said that he had an agreement to sell, with several smaller land owners, and as soon as the developer advanced him money, he would get the title transferred to his name. As this was not agreeable to the developer, the deal was called off,” shares Bansal.

More often than not, the builder is the dominant partner in such JVs. It is the builder’s responsibility to get all the clearances for the project. However, he may claim that he had to incur heavier-than-anticipated expenses, for getting those clearances and demand a higher share of revenue than was originally agreed upon.

[] How do tripartite agreements work?

Sometimes, a builder may delay the project and then claim that costs have escalated, to demand a higher share of the revenue. If the land owner does not relent, the developer may stall the work on the project. Conversely, a land owner may try to delay the transfer of title to the builder, to retain bargaining power in the JV.

Impact on buyers

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Delays in completion of projects, resulting in higher costs for the buyer, are the most common outcome of infighting among partners. End-users may have to bear the burden of paying EMIs and rent, for longer. If the buyer plans to rent out the flat, his expected cash flow gets delayed. If interest rates rise in the interim period, the buyer’s EMI escalates. Moreover, delays due to infighting, may make it impossible for the buyer to sell the house.

Under the profit-sharing agreement, builders sometimes sell several units in the project to the land owners. Consider a scenario, where a developer has sold towers in a luxury project to the land owners, says Rajan Ahuja, director of Realty & Verticals, an NCR-based real estate brokerage firm. “If the land owners and other buyers do not belong to the same socio-economic class, it may become difficult to ensure that all the residents are socially compatible and live in harmony,” he cautions.

What can buyers do?

One option before the buyer, is to reject JV projects and choose one, where the builder is also the land owner. Buyers, who opt for JV projects, should conduct proper due diligence and ensure that the developer has received the title to the land. Examine the developer’s track record. Has he pulled off JVs in the past? Are any of his previous projects stuck in land-related disputes? Despite this due diligence, risks exist, as with any real estate project.

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Category: Lifestyle

Debora Berti

Università degli Studi di Firenze, IT

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