Joint Venture (JV) in property development is essentially a business arrangement between two or more parties to share the investment burden of developing a property usually for some benefits or returns in terms of profit. All parties usually share the following items in common – profit, loss, and cost. This is not often the same as Joint Technical Partnership, JT because neither of the parties might be investing their technical skills into the development. Most JVs for commercial real estate investment normally involve two parties – the Landowner/Property Owner(s) and the Developer or capital partner and an operating partner. In some cases, there is often a tripartite agreement or three-way arrangement between the Landowner/Property Owner(s), the Developer, and the Financier. Sometimes, the capital partner can also be the operating partner. With all these sorts of arrangements come a couple of commitments here and there. One of these items of commitment is referred to as ‘premium’.
What is Premium?
Premium in Property Development JV is a fee paid to the Landowner/Property Owner(s) by either the developer in a two-way arrangement or either the developer or the financier in a three-way arrangement to take care of or cover some short-term expenses that might impede on the usage of his land for the proposed development. In some instances ‘Premium’ could also have other meanings and sometimes premium can be paid by the operating partner to a capital partner to cover some cost of finance.
Any fixed Amount or Percentage or Standard Fee for Premium?
There are no fixed amounts for premium fees. It is initiated and negotiated on a case-by-case basis based on a need assessment and the golden rule is that in any case, it should not extend beyond 10 percent of the value of the property. For instance, it could cover the cost of temporal inconvenience and relocation for the property owner where applicable or it could simply serve as a temporal relief to the property owner to cover the rental benefits they could have derived from the property during the construction, reconstruction, or development period. Generally premium is usually a very small fraction of the fair market value of the property. In a saturated property market, ‘premium’ is often misconstrued and property owners like to play the ostrich.
Is Premium Compulsory?
Premium is not a compulsory item and can be intentionally absent in a JV deal. Many successful JV deals do not have the item of premium in them because as reiterated by developers at Heavensbeautiful, it has led to the collapse or death of many decent and promising JV deals even before they could see the light of day. Hence, many developers or financiers are not attracted to JV deals with the item of premium in them. They simply jettison it and move on to the other available options.
The Real Motive Behind Joint Venture Partnerships
The idea of a JV partnership in property development is to share the cost burden as well as the burden of profit and loss. Property development is a capital-intensive venture and the cost generally comes down to the cost of finance, land or landed property, design, approval, site preparation, construction, finishes, marketing, and servicing. Most developers cannot single-handedly cover these costs and where there is a burden bearer, the burden becomes lighter. On the other hand, some people have fixed assets like land or landed properties or have the finance to cover major cost items like construction but don’t have the skills, time, structure, or even interest in engaging in other items of development. Individual parties can match up to form a JV partnership to achieve a common goal to the benefit of all stakeholders that’s the real motive.
Is ‘Premium’ the same as an agency or facilitator’s fees?
Facilitator’s or agency fee is not the same as the premium. It is a fee charged by the match-makers of the JV deals in this sense. There are Property Apps and websites where you can find authentic and verified direct JV listings that you might be interested in. Upon closing the deal, the facilitators charge a fee paid by the other parties e.g. the developer, the property owner, or even the financier directly to the lead facilitator/agent for onward distribution to other facilitators/agent involved in the deal or a manner determined by the parties involved, usually in a separate agreement. Facilitator’s fee should not also be mistaken for legal fees.
How is Goodwill Linked to Joint Venture?
The concept of goodwill in JVs is neither strange nor funny in the local context but in some climes, it’s weird. Some land owners ask for a goodwill payment also known as Owo-Iwoko (traditionally interpreted as money to enter the land/farm, as an item of acceptance and blessing) before the developer can begin work on the land, especially for Clearing or Title Sponsorships JVs. For property development as par building construction or flipping, some property owners do not include a premium on the deal but ask for a goodwill fee as a token of consent and acceptance of the deal. Goodwill is usually a very small token that doesn’t normally depend on the value of the property.