For real estate developments developers and landowners uses different types of development agreements based on needs of the transactions. This article examines the different types of development agreements that landowners may enter with developers. Broadly, there are three types of development agreements between landowners and developers, namely, Joint Development Agreements (JDAs), Joint Venture (JV) and Development Management (DM).
JDA is the most common and simple form of partnership. It is used by all types of landowners and development for different asset classes. JVs are generally used between evolved LL and reputed developers. Here landowners need to have a good knowledge and experience of real estate business and as it needs more trust among partners, the other partner also need to be of good repute and track record. JVs are also used between two developers and between developer and fund houses.
DM agreements are used between experienced landowners and reputed developers. Here developers provide all development services from designing to sales/ leasing of space for an agreed fee or share in the project. Here developers act like a service provider not a partner for the project. This model is suitable for residential and for projects where landowners does not want to part with ownership including rental yielding assets (office and retail) and hospitality. DM is also used to unlock stalled projects where existing developer, landowners and fund house assign the project to a reputed developer to complete the project for a fee.
Key development agreements between landowners and developers:
1. Joint Development Agreement (JDA)
In a JDA a landowner contributes his land for the construction of a real estate project and the developer undertakes the responsibility for the obtaining approvals, construction of project, sales and marketing and raising funds for the development. There are two types of JDA, namely Area Sharing and Revenue Sharing.
Area Sharing: In an area sharing model, built-up area of the developed project is shared between the landowner and developer. The area sharing methodology is defined in the JDA and it is documented post receipt of development approval through area sharing/ allocation agreement. In the said agreement, the Parties will clearly identify the units which will be allotted to the Developer as a part of Developer’s share and to be allotted the Owner as a part of the Developer share. Area sharing is more prominent for the landowner who may want to hold on to their share of inventory to enjoy the benefits for capital appreciation of their share.
Revenue Sharing: In this agreement, the landowner and the developer shares the proceeds (“distributable revenue”) arising from the development as per specified ratio. The term "distributable revenue" which is specifically defined in the development agreement apart from other terms and conditions. The landowner and the developer join together in a tripartite agreement with the ultimate purchaser of the apartment wherein the landowner agrees to convey undivided right, title and interest in land to and in favor of the prospective purchaser of apartments and the developer agrees to convey the specified super built up area being constructed on the land in favor of ultimate purchaser.
The insurable interest of the super built up area being constructed on the land would be on the developer during the period of construction and till the date of its transfer. The legal ownership, domain and control of the land remains vested with the landowner and no portion of it will be transferred to the developer.
It is advisable to consult a tax consultant before deciding between area sharing and revenue sharing model as the way asset lies in landowner’s account and capital tax liability plays important role in the selection.
2. Joint Venture (JV)
A joint venture is a business arrangement in which a landowner and a real estate developer agree to pool their resources for the purpose of developing a real estate project whether commercial, residential, or industrial. Both the landowner and the developer have a stake in profits, losses and costs associated with it. The parties involved in the Joint Venture form an operating agreement, or commonly referred as joint venture agreement. This agreement lays out the specific rights of each party including:
- The capital obligations of each party.
- The partnership management structure.
- The rights and responsibilities of each party.
- Exit rights and transfer rights with respect to the sale or transfer of membership interests in the JV.
- The downside protection for the land value contributed by the landowner, and
- The profit-sharing mechanism.
In a Real Estate JV, the role of the landowner is to provide the land for development while the developer is responsible for the construction, marketing, financing, and managing the overall operations of the project. The landowner registers the land parcel in a Special Purpose Vehicle (SPV) or the two parties will form a new company such as an LLP, partnership or private limited firm. The profit from the project is shared in the ratio of the JV partners’ shareholding structure. By joining forces, no party takes on the full burden of funding, acquiring, developing, and managing the operations of the project, thus diversifying their risk exposure.
A Joint Venture is more suitable for corporate landowners with large land parcels and developers who intend to work on a big-scale real estate project. As a result, both can diversify the rewards and risk involved in the project which becomes a win-win situation for both the parties.
3. Development Management (DM)
Development Management (DM) is an emerging business model in the real estate industry. In the DM, the landowner provides the developer a share of project revenue, profit or pre agreed share of the completed development for project execution, marketing and branding the project. In this model, developer is also responsible for raising capital but project development, but all project finance is on the landowner’s property and name. Here developer is more acting like a service provider to the landowner.
There are different versions available in DM, in few cases developer’s responsibility is restricted only to marketing, sales and branding of the project whereas project execution and financing remains with the landowners. The purpose of DM agreement is to utilize the brand credibility of the real estate developer to gain maximum customer reach for the project.
All models provide different levels of return and freedom to landowners and developer. The selection of the model is dependent on long term objective of the landowner, reputation of the partner developer, type of asset, scale of the project, and other parameters. Landowners needs to understand risk and reward of each agreement before taking the decision on the same. For example, DM would provide highest return to the landowners, but it requires landowners to take more responsibilities and project risks compared to other two models.
Meraqi has assisted many property owners for land monetization transaction across different asset classes. We provide, market research, partner search, financial analysis, bid management and analysis, negotiation, transaction document review and asset management services.