To wed or not to wed? What you need to know about real estate joint ventures

Entrepreneurs and companies wanting to pursue real estate projects that are bigger than their usual undertakings require considerable resources, additional competent and experienced managers and staff, not to mention excellent reputation and proven track record. 

Unfortunately, not all land owners and micro, small and medium-size enterprises (MSME) businessmen have access to all of these resources to make a new project work. Forming a joint venture is one of the strategies that can be utilized to attain such a goal. 

Definition

Rule 2, Section (i) of the Implementing Rules and Regulations of Republic Act No. 10667 or the Philippine Competition Act defines a joint venture as “a business arrangement whereby an entity or group of entities contribute capital, services, assets, or a combination of any or all of the foregoing, to undertake an investment activity or a specific project, where each entity shall have the right to direct and govern the policies in connection therewith, with the intention to share both profits and risks and losses subject to agreement by the entities.”

A joint venture is thus a collaboration for the purpose of accomplishing a set of goals, formed by parties using interjected resources based on agreed equity contribution and governance structure, with shared risks and rewards.

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Benefits of partnering

• Shared capital contribution

Many businessmen or firms enter into joint ventures because one of them possibly lacks the required funds, assets, expertise, knowledge and skills, managers and staff, required technologies, or access to specific market type or location, herein liberally known as capital. 

Coming together provides one or all of them better accessibility to different resources as the joint venture helps accelerate the acquisition of new knowledge, insights and expertise, while permitting the collaborative work to attain services or production upgrades by opening access to unfamiliar technologies and innovations without necessarily investing large sums, thereby bringing the product/s or services to market swiftly and making the heavy responsibility of development less challenging.

• Flexible corporate structure

The JV set-up can be formal and structured, or informal and temporary. It can be undertaken within the same or different industries, or project types. These flexibilities allow infinite variations and can be suited to their risk appetites and reduce the potential liabilities the team is willing to confront. 

Meanwhile, colleagues do not need to let go of their own businesses. Each endeavor can maintain its own identity and partners can simultaneously undertake multiple projects. 

In the worst scenario that the venture does not work out, the parties can withhold further commitments and consider disengaging amicably. Thus, the length of the joint undertaking does not necessarily have to be dependent on achieving the desired goal/s. 

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• Overcome competition with shared risks

Joint ventures are recommended for land owners because they facilitate the delivery of higher quality projects using their properties. In addition, it opens them up to new and or expanded market share with less risks. 

While partners may have different backgrounds, specializations and market stakes, these differences actually equip the team with expanded knowledge and resources required to address various concerns, thereby allowing the JV to overcome potential obstacles and reap early rewards. As an example, a company’s brokers network can provide the other with an immediate and expanded sales channel needed to sell their product, grow their revenue and net income.

• Enhanced credibility

Small businesses take longer to reach first-rate standing. Teaming up helps build brand value faster and increases credibility sooner. With the help of a reputable brand and excellent name recall, customer confidence can be formed rapidly thus allowing the JV’s products and services to be desired and be well patronized.

Issues confronting JVs

Entering into a joint venture is not without risks and challenges. Partnering with someone you know does not necessarily mean that everything will be smooth and successful as issues cannot be completely avoided. 

Unless the visions and key objectives are patently clear and well-defined, and that the partners are willing to overlook hiccups or give in to calibrated compromises, it is possible that these differences may lead to stumbling blocks, or worse, business disaster.

Problems may also arise due to lack of communication, or if a partner feels that the other is not providing the same level of effort, not fulfilling his committed share of resources, or matching his enthusiasm or responsibilities.

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Caveat

There are other elements that need to be understood before pursuing the team-up, such as the legal considerations and regulatory requirements. Consult a professional before deciding to go to bed together.

References used include Republic Act No. 10667 or the Philippine Competition Act and its Implementing Rules and Regulations (phcc.gov.ph); “17 Advantages and Disadvantages of Joint Ventures” (vittana.org); “What are the Primary Advantages of Forming a Joint Venture?” (Investopedia.com) 

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The article was originally published in The Philippine Star – Property Report PH and written by Henry L. Yap.

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