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Does A Jv Investor Need An Attorney At The Outset Of An Investment?
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Should a land investor working in a joint venture partnership engage a solicitor?
The popularity of joint ventures for land has soared with the Limited Liability Partnerships Act 2000. But other types of partnerships might be considered.
Joint Ventures (JVs) are a common means for several individuals to collectively invest and grow an asset. As should be obvious, the risks and rewards of that asset are spread among the partners – enabling smaller investors to participate in capital growth just as much as the super-wealthy who are more able to do it on their own.
But the risk part of JVs is no light matter. Poorly managed joint venture partnerships are the stuff of legal and financial legend – even large entities such as the alliance between Honda and Rover (1981-1994) can end badly. In that case, the assets brought to the partnership included car design, engineering, distribution and marketing capacities, which proved to be a poor fit over time.
Land investment joint ventures are a bit different in that they generally require capital to invest in the land itself and the expertise to turn the property into a more productive asset. For example, in the UK a pressing need for housing makes it likely that land currently in use for agriculture on the periphery of population centres will be converted to residential and commercial uses. Land investors working in joint ventures with UK land fund mangers can do well to purchase tracts that can optimally serve these purposes. But to do it right, the investors must also know how to select land that is likely to achieve local planning authority goals for growth, and they must build the infrastructure on the land that will attract developers and builders.
Still, what needs to be central to the investor is how to limit his or her exposure in this type of investment. Savvy decision-making is the province of the investor and his or her advisors. But the engagement of legal counsel can play a role as well, by various degrees according to the type of partnership that is established.
Three types of partnerships – and questions the JV investor should
A prominent London-based law firm with a large, property joint venture practice advises its clients to look at the three most common types of partnership vehicles to assess the relative risks and appropriateness for them and their proposed investment:
General partnerships – These require no formal declarations, a relationship that is tax transparent (each participant is tax-liable for income and capital gains, not the partnership). The largest risks lie in how each member of the partnership is jointly and severally liable for debts; they are not able to ringfence losses and liabilities. The Partnership Act 1890 governs general partnerships.
Limited partnerships – These need to be registered at Companies House, and include two types of partners: limited and general. Limited partners are liable only for their investment, and they are forbidden from involvement in the management of the business under the partnership. The general partner is exposed to all liabilities, and is tasked with full management responsibilities of the business itself. The Limited Partnership Act 1907 governs this arrangement.
Limited Liability Partnerships (LLPs) – Considered a hybrid between companies and partnerships, investors enjoy limited liability (as the name implies) but also offers them involvement in the management of the business. Members are taxed only on their share of profits from the investment, which has made the investment very popular since introduced by the Limited Liability Partnerships Act 2000.
According to the solicitors who work in this area, investors need to weight the pros and cons of these three joint venture structures, as well as private limited companies and unit trusts. The process of determining which is right for the investors and the investments might take into consideration several factors, as follows:
Development or investment? The nature of the land investment – and its size – can determine whether a simple or complex structure makes the most sense.
Investor relationships. A collection of several passive investors is different from long-term partners who are comfortable with joint and several liability. In other words, the degree of familiarity with your partners can make a big difference.
Tax transparencies. Not only should investors’ current tax scenario play into such a decision, but ask whether the structure of the investment or your own situation will change at some future point that might affect tax liabilities as well.
The liabilities in land – If a property needs remediation, for example, the partnership will have additional expenses and potential legal exposure. Good advance research should uncover this before entering a contract to purchase the property, of course, but as with any business venture there can be liabilities against which investors must protect themselves.
Exit routes – Should an investor need to cash out of the investment, would he or she be able to do so? Understand the liquidity and flexibility of the structure to know whether or not this is an option or risk.
As important as legal counsel may be in some investments for some investors, of equal importance is the role of an independent financial advisor. All investments should be undertaken with regard to one’s portfolio, risk tolerance and expected returns, which often benefit from the review and analysis of a professional third party.
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