The first step in any property development project is to correctly categorise the relationship of the parties to the project. There are two main ways to go about a property development: as a joint venture or as a partnership. It’s paramount that you adopt a structure that best suits the project goals as well as the interests of all relevant parties.
Framing the Relationships Between Participants
In a property development project, usually one party brings the land and the other provides the development expertise (this typically includes the skills and resources needed to actually construct the building). It’s common for such relationships to be referred to as joint ventures; however, merely labelling the project as such is insufficient and sometimes the relationship can constitute as a partnership.
Joint ventures and partnerships are very different with hugely varied legal and tax consequences. So, careful consideration needs to be taken to correctly identify the relationship and draft the relevant agreements. It’s crucial that the roles, rights and obligations of each party (as well as how risks and liabilities are to be allocated) are clearly mapped out in both cases – this is pretty much the only similarity.
Joint Venture or Partnership?
A joint venture is where two or more individuals or companies collaborate to undertake a common commercial goal, while maintaining their separate businesses during the course of a project. The central feature of a joint venture is that the parties intend to share in the product of the property development. Partnerships are distinctly different because the parties carry on a single business with a common view to profit.
Here are some important factors in a property development project that should be considered when it comes to choosing a joint venture or partnership structure:
Implications of Company Structures
An incorrect characterisation of the company structure can have unexpected repercussions; for instance, an agreement stated to be a joint venture may at law really give rise to a partnership, and the parties may then be jointly and severally liable for any liabilities, which may not have been intended.
Ultimately, this would give rise to one joint obligation held by the parties to perform contracts which may be entered into. Whereas under a joint venture you can ‘ring-fence’ your contribution and your liability for an agreed share of the property development titles which can be achieved by undertaking subdivisions.
Additionally, having the incorrect structure can create serious adverse consequences, especially in relation to tax and GST (putting aside the myriad stamp duty, income and capital gains tax consequences that might arise through using a unit trust or a company as the vehicle for the development).
Here are some examples.
If the arrangement is a partnership:
- The partnership will be a notional tax entity and each partner will be taxed on a share of profits and may have to contribute to losses in the same proportion as their share of profits.
- The partnership may have to register for GST.
If the arrangement is a joint venture:
- Each of the participants will be required to include a share of profits in their assessable income.
- The landowner party in the joint venture will be required to account for GST on sales.
- The dealings between the landowner and the other co-venturer may constitute taxable supplies.
Key Considerations When it Comes to Structuring Your Property Development
It’s of the utmost importance that you engage professional lawyers and accountants to help you navigate through the complexities of your property development ownership structure, to ensure your company is structured correctly and as cost effectively as possible. A failure to do so can create headaches down the track, such as unexpected costs and liabilities, and the risk of costly disputes.
Our multidisciplinary BlueRock property team has structuring, taxation, commercial law and property law experience, and is ideally placed to assist you with your pre-development planning. If you’re looking to start up a property development project or would like to talk through your ideas, get in touch with BlueRock to get the ball rolling smoothly.
You might also like to check out our Basic Guide to Starting Out in Property Development article for more tips on how to run a successful property development project.