Tips for landowners before they enter into a joint venture agreement with real estate developers

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Recently, our team was interacting with some of the landowners who have entered into a joint venture agreement with real estate developers in Delhi NCR region. Now, believe it or not, most of these landowners are inheritors of ancestral property and have no clue about the legalities of a joint venture. They go as per the words of their confidants and sometimes find themselves into trouble. Take this, a landowner who entered into a joint venture agreement with a real estate developer in 2006 still finds that his land has been locked by the developer and there are no signs of the proposed group housing project taking off. What can you as the owner of land do before entering into a joint venture with a property developer?

1. First of all, what is a joint venture between a landowner and a real estate developer?
Joint ventures are formed by at least two parties with the objective of achieving a specific investment return. Unlike many other business agreements, when the objective is achieved, the joint venture is usually terminated. Following are the attributes of a joint venture.

• Risk sharing: A single investor may be unwilling to undertake a real estate venture because of its size, location, capital requirements, and/or duration. However, by sharing the risk, two or more parties may be willing to undertake the venture.
• Combining expertise with capital: Joint ventures are frequently formed as a way to pool equity capital from one or more sources, as well as a means of bringing parties with different expertise to the venture. A joint venture could also involve purchasing existing properties and operating them. In this case, one of the parties may be responsible for acquisition, leasing, and management, and others may provide capital.
• Speculative objectives

2. Organizational forms

Participants in joint ventures may include any combination of individual investors, partnerships, corporations, or trusts. However, a joint venture in and of itself is not a legal form of organization. In order to specify capital contributions, rights, duties, profit sharing, and the like, a joint venture agreement or a business entity must be created. The choice of organizational form used to accommodate those various groups of investors could be a partnership, corporation, Pvt. Ltd, or trust. Partnerships are frequently the vehicle of choice in real estate joint venture.

3. Profit sharing

Because the parties to a joint venture may contribute different things, and possibly in different proportions, a partnership must be structured such that it provides economic incentives for all parties. Differences in tax status of investors also may affect the way partnerships are structured.

A joint venture can take on a number of different partnership forms. The most common is the limited partnership. As is the case with all partnerships, there must be at least one general partner and any number of limited partners. Generally, in real estate, limited partners are the investors that provide most of the equity capital, while general partners are usually responsible for managing the partnership assets and may contribute a relatively small portion of the required equity capital.

4. Following factors are considered by potential investors for structuring a joint venture.

• How much initial capital will the parties contribute and how will the parties contribute additional capital if needed in the future?
• How will the parties share in the annual cash flows to be produced from operating the property?
• How will the parties share in the cash flow received from sale of the property?
• Will some of the parties receive a preferred return? Will the preferred return be paid from annual cash flows and/or from sale?
• Will taxable income (or losses) and capital gain (or loss) be shared in the same proportion that operating cash flow to be distributed?
• Who will have control over the operation of the property and decisions involving capital improvements, approving leases to tenants, financing and possibly refinancing the property, and when to sell the property?

5. Points you as the owner of the land must keep in mind:

• Check the credentials of the developer. His past record and success in achieving targets.
• Before entering into a joint venture agreement with a builder, register your company and transfer the land on the book of this new entity. You can hold 100% of shares of this new entity or shares can be held by various promoters depending on their claim in the land. The new entity formed should ideally be registered as private limited company under the company’s law act of India.
• Now, enter a joint venture agreement with a builder’s company. Therefore, the agreement is between two companies. One providing land for the development of the project and other providing capital and expertise to develop the project.
• How do you decide on profit sharing? Well, we have defined it above. However, Recent trends in India indicates a 1/3rd – 2/3rd rule. 1/3rd of the project outflows going to the landowner and 2/3rd of the project outflows going to the real estate developer.
• As a landowner, make sure that the number of housing units or the developed area of the project is assigned to you and is clearly mentioned in the joint venture agreement. For example, in case of housing project, you should have the housing unit number, size, and floor in the joint venture agreement.
• As an example, a landowner enters into a joint venture agreement with a ABC real estate developer Pvt. Ltd. The plot of land measures 20 acres and about 600 housing units would be developed. As a thumb of rule, 200 units should be assigned to landowner and remaining 400 to the builder. For a landowner, this kind of agreement is safe and can result better returns for his/her land as opposed to the agreement wherein builder pays the 1/3rd of the cash inflows to the landowner on the sale of housing units.
• Hire a professional legal company with expertise in real estate joint agreements, and due-diligence.

Find the sample Joint Venture agreement between a landowner and the real estate developer.

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A typical real estate project development process

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Once the land development process has been completed successfully, a developer will focus his/her energies on the project development process. Developing and delivering a real estate project successfully is challenging and it lasts for several years passing through various phases. Primarily any real estate project can be divided into 5 phases:


Phase I – Land acquisition
The details about land acquisition process can be found in our earlier post of land development process.


Phase II – Construction
Construction phase requires applying for license (permitting), and project development.

• Permitting/Licensing:

The permitting process usually begins with an application which identifies the site, its location, and a preliminary design of the improvements to be constructed. This application is then used by public officials to verify compliance with its current zoning classification. If it complies, the permit is granted and the construction of the project may commence subject to building codes and inspections. If the permit is denied, the applicant will usually clarify or amend the application and will ask the city planning staff/director to review it again.

• Preliminary checklist – Project development:

This checklist is usually the first step that a developer reviews when evaluating a site for possible development.

1. Allowable uses per zoning classification.
2. Minimum lot size per zoning classification.
3. Maximum floor to area ratio (FAR).
4. Building bulk/density limits.
5. Setback/building line.
6. Building height limits.
7. Building footprint/envelope.
8. Parking ratios.

• Important terms/project development:

1. Setback/building line – requirement to construct building a specified number of feet (setback) from the right-of-way line or other landmark.
2. Right-of-way line – area designated for a public street or alley that is dedicated for traffic, public use, utilities, etc.
3. Building related terms:
• Footprint – it is the shape or outline of the primary building slab or foundation as it will be constructed on the site.
• Envelope – the total outside perimeter of a structure, including footprints and any exterior patios, mall ways, landscaping, etc.
• Facade – the exterior, usually the main entrance of a structure
• Bulk – a three dimensional space within which height, width, footprint, and number of structures/elevations/shapes are viewed in total relative to the land area upon which it will sit to determine land use intensity.
• Building codes – refer to required materials and methods used to construct improvements within a jurisdiction.
• Permit- document executed by the director of planning authorizing the construction, restoration, alteration, repair, etc., of a structure and acknowledging that it conforms to requirements under the applicable zoning ordinance.
4. Floor to area ratio (FAR) – it is usually calculated as gross building area divided by square footage of land area.
5. Height restrictions – used to limit the vertical height of a structure to be constructed.
6. Allowable use – user activities permitted in a zoning classification
7. Impact fees – charged by public entities to cover added public sector expenses expected to be caused by the development such as traffic control, drainage, etc.
8. Incentive zoning – used by city planners to accomplish community goals simultaneously with private sector development.
9. Inclusion zoning – part of a zoning ordinance that requires that a specified type of development be included in order to obtain permit for that site.
10. Minimum lot size – per zoning classification
11. Parking ratio – required number of parking spaces per sq. ft of gross building space or per number of apartment units.
12. Site plans – drawing done to scale depicting the placement relative to other requirements
13. Traffic counts – number of vehicle trips per hour past a specific site.
14. Encroachment – occurs when the construction of improvements extends over a property line on to an adjacent property.
15. Property tax abatement – forgiveness of taxes for a specified number of years.
16. Land to value ratio – calculated as rupee value of land to total project value (including land) anticipated upon completion of project.

Phase III – Completion and occupancy

There are certain risks in any real estate project development. Once the construction has been completed, there is an additional risk of selling and handing over the project to clients or bringing in tenants in case of rental property. Risk begins with land acquisition and increase steadily as construction commences until cash flows from the leasing phase materialize. It should be noted that factors determining the demand for type of space (such as office, retail, warehouse) being developed are critical to project risk. These factors may manifest themselves in current market indicators, such as vacancy rate levels, rent levels, or the extent of leasing commitments from the tenants.

A very good understanding of the underlying economic base of an urban area or region is critical when assessing the viability of real estate development.  The point is that investors must examine the demand for space in terms of the characteristics of the demand by end users (tenants) in a given market. This demand in turn depends on the type of employment in the local market and the nature of the functions tenants will perform. Only by understanding the local economy and the nature of employment can developer anticipate demand accurately and produce and supply the quantity and quality of space in the proper combination to satisfy market demand.

Phase IV – Management

Once the property is occupied by clients/tenants, there is need for professionally managed facility management team. This team can look into the property management tasks such as maintenance, HVAC, parking management, security, civil works, housekeeping, landscaping, etc. These tasks are equally important and ascertain the long life of property and thus ensure positive rental income as well as capital appreciation. 

Phase V – Sale

The developer may choose to sell the property from construction phase onward as happens in residential development in India. Or he/she may choose to hold the property in case of commercial developments provided rental income from the commercial properties is significant enough to justify retention.

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Land Development Process in India

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Land development:

1. Acquisition of land with the intention of constructing utilities and surface improvements
2. Reselling some or all of the developed sites to project developers or in case of housing to home builders.

Key criteria for land development business:

Before proceeding with the development, however, there must be evidence that the project is feasible or that market acceptance of the end-product (single family houses, offices, warehouses, etc.) is highly likely. This step is important even though the land developer may or may not be the developer of the final product. In other words, in the land development phase, the developer must anticipate and understand the demand for the final product (or products in the case of a mixed-use land development). For example, the economic drivers may alter the land use for residential, industrial, or for commercial developments such as Office Space in Gurgaon.

In residential land development, it is common to find firms specializing in the acquisition of raw land in suburban fringe areas and developing sites for single family detached units or for multiple uses, such as combinations of single family units, multifamily apartments and cluster housing.

Based on the market segment in which the end use will likely sell, the land developer

1. Acquires land
2. Develops a land use and traffic circulation plan
3. Constructs streets, lighting, and subsurface improvements (utilities, drainage, sewage)
4. The developer then subdivides individual sites, and sells smaller sites to builders and project developers.
5. The developer may also retain some retail sites for later sale if the site has suitable highway frontage.
6. The land developers usually stand ready to sell sites to other project developers as long as those project developers abide by the required development controls. These controls usually include construction of buildings of adequate quality, maintenance, landscaping, and so on. These controls are usually specified in deed restrictions and/or provisions in an agreement governing the operation of a business park owner’s association.

Important note: Land developers and builders or project developers may or may not be the same entities.

Feasibility study:

Many land development firms usually exist in a given urban market.

1. They enter the market for raw land by contacting landowners or land brokers and obtaining information on tracts of land available for sale.
2. These developers then engage consultants to conduct market studies to assess the demand for end use that would ultimately be developed and price ranges for each use.
3. The developer then completes a preliminary land plan, estimates the land development cost, and analyzes whether the tract can be purchased and developed profitably.

General observation:

In many cases the developer is more of a facilitator of the development process than a firm that undertakes all necessary functions in the land development process. Many functions may be done by consulting firms (land planners, civil engineers, and landscape architects) and contractors (roads and utility construction companies). In these instances, the developer owns the land, obtains the necessary financing, and implements the overall development plan, but may not employ a staff that is directly involved in construction or design. The developer must also interact with public sector officials in obtaining various project approvals and changes in zoning when necessary, and then market sites to project developers and/or builders.

The land development process:

• Acquisition of land – use of the option contract

The developer usually negotiates an option contract because it takes time to accomplish various tasks and activities prior to the decision to actually purchase the land. Some of these activities are:

Site inspection, preliminary market study, preliminary cost estimates, soil studies, engineering, feasibility, appraisal, and design strategy, bidding and/or negotiating with contractors, plan for public approvals, plan for financing.

Option periods can be very short (one month for small residential land development) or as long as 3 years or more (regional shopping centers)

• Financing and development

When financing the land acquisition and development process, a number of structures may be available to the developer.

1. The developer may purchase the land for cash. The developer may then obtain a loan for the cost of improvements and interest carry.
2. The developer may purchase the land by making a down payment only. The seller finances all or a portion of the land sale by taking back a purchase-money mortgage from the developer. The developer then acquires a loan for improvements only. The seller of the land (mortgagee) agrees to subordinate the lien represented by the purchase-money mortgage to the development loan, and the developer repays the sellers’ mortgage from funds as parcels are sold and after payments on the development loan are made.
3. The developer purchases the land by making a down payment and obtaining one loan based on a percentage of the appraised value of land plus improvements. The funds pay off the seller and construction improvements. 

An example showing the possible land development process in Haryana, India:

Land Development process in Haryana

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What is Land use Zoning in India? What are the uses that are permitted for various types of zones?

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While developing the master plan for a particular city, the town planning officials make use of zoning regulations. So, what are these zoning regulations? Based on the city’s geography, the land use is zoned by town planning officials. For example, in flood prone areas, the land use may be restricted to parks, gardens, playgrounds. The construction activity in these areas/zones may be restricted. Similarly, in hilly areas, construction of residential premises may be prohibited. Therefore, in essence, zoning regulations are tools used by town planning officials to clearly demarcate land use for the purposes of development, welfare, and safety.

In cities, Zoning is done to earmark residential, commercial, industrial, recreational development. Certain zones within a given city are demarcated as residential zones, some as industrial zones, and some as institutional zones. All of these zones are clearly highlighted within a master plan of a city. The town planning department then invites private developers to bid or buy the piece of land within these Zones. Some developers may buy or bid for residential land, while some may opt for institutional land.

Zoning is a complex subject because it involves the optimum usage of limited land available to city officials. Zoning regulations are in operation in all major cities and towns of India to regulate the use of property within their jurisdiction. Agricultural, industrial, residential, commercial, recreation and forest areas are clearly marked on city maps.

Find below the ‘Types of Zones’ and the uses permitted for these Zones.

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