How property development joint ventures work in South Australia

A development joint venture (JV) lets people build something none of them could manage alone. It might be two people. It might be several.

That's what makes it such an exciting tool. A JV can get you into a development you could never have funded or run by yourself. You share in a developer's profit — often without doing any of the developer's work. Here's how they work, and what to look for before entering one.

Most people arrive at a JV from one of two directions. Either you own a site, or you have the money and borrowing capacity to fund one. This article has three parts. First the basic traits of a JV. Then a section for each side — if you own the land, or if you're bringing the money. And I'll close with the things to be aware of before you sign, like the general risks and seeking independent advice.

The four ingredients

Every development needs four things:

• A site with genuine profit potential.
• A skilled manager to deliver the project plan to a profitable outcome.
• Cash. Money you can put in up front. It covers the deposit, the consultants, the approvals and the holding costs before any bank money arrives.
• Borrowing capacity. What a lender will actually let you borrow, based on your income, your assets and your credit history.

Cash and borrowing capacity are not the same thing. Plenty of people have one without the other.

Have all four in abundance and you can do the project on your own. That's the appeal of a JV: you don't need all four yourself. You need people who cover all four between them.

Any combination works. Everyone can chip in a little of each — some cash, some borrowing, a share of the managing, a hand finding the site. In practice it's usually simpler than that.

• An investor and a developer. One brings the cash and the borrowing. The other finds the opportunity and manages it through.
• A landowner and a developer. The owner contributes the land (ideally with low or no debt attached), and that counts as their contribution. The developer typically brings the cash and the skill, and sees the project to completion.

Profits are usually shared in proportion to what each party contributes.

Roles and returns typically look like this:

Own land? Start with a free assessment. Bringing capital? See how partnering works.

What counts as a "joint venture"

"Joint venture" is a loose label. The same words cover very different deals:

• a development agreement with a profit share;
• an arrangement where a party takes finished allotments/property instead of cash; or
• a conditional sale with a top-up linked to the result.

Each carries different legal and tax consequences.

How JVs are structured

There's no single template. One common structure is an unincorporated joint venture of two entities governed by a JV agreement. Another is a special-purpose company or unit trust, in which each party holds an interest. Which one is right depends on intent, tax, finance and each party's circumstances. This is squarely the territory of an experienced accountant and solicitor, and any developer worth partnering with will insist you use them.

A JV is not a legal partnership, and the difference matters. In a partnership, each partner can be liable for all of the debts, and each can commit the others. A JV agreement is normally drafted to exclude both. Check that yours says so.

Where the money goes: the waterfall

When the project sells, the money comes out in an agreed order — the distribution waterfall. A simple one runs like this:

1. GST, selling and settlement costs.
2. The project lender — loan, interest and fees.
3. Outstanding development and construction costs.
4. Any cash the parties put in.
5. The agreed value of any land contributed.
6. The remaining profit, split in the agreed shares.

If you own the land

You have the site. A partner brings the cash, the borrowing and the skill to build on it. Instead of a price at settlement, you take a share of what the finished project makes.

The appeal is that you keep exposure to the development premium without funding or running the project. (Compared here: sell, subdivide yourself, or JV.)

The cost is that you don't walk away. Sell outright and you agree a price, settle, and that's the end of it. A JV keeps you tied to what happens next. You may not be paid until the land is divided, the homes are built, or the finished properties sell.

Start with what the land is worth

Your land is your contribution, so pin its value down at the start — by valuation, comparable sales, or an agreed direct-sale price. Don't leave it as a number to be settled once the project is underway.

Then get clear on how that value is treated:

• Is your agreed land value returned to you before profit is divided, or is it just your equity in the pot?
• Are you paid in cash, finished allotments, or completed homes?

What it means to put your land up as security

Most JVs need the land as security. That's how the project gets funded. A lender wants something to lend against, and the site is it. This is normal and usually unavoidable. It just needs to be understood before you sign.

Here is what it means in practice.

Your borrowing capacity gets tied up. While the project runs, that equity is committed. Any lender assessing you for something else will see the exposure. So if you're planning to buy a car, pick up another property or refinance your home, sort it out before the project starts. At the very least, check first that you still can.

There's a difference between security and a guarantee. Putting up the land for security limits your exposure to just the land. A personal guarantee brings your other assets and your income into it as well. Ask which one you're being asked for.

The property isn't freely yours in the meantime. With a mortgage or caveat on the title, you can't simply sell or refinance it mid-project. Plan around a commitment of twelve to twenty-four months, not a few weeks.

If the project fails badly, the security can be called on. That is the real downside. It's why the feasibility and the partner matter every bit as much as the profit split.

None of this is a reason to avoid a JV. It is a reason to go in with your eyes open. Before you sign, get clear on:

• the maximum that can be borrowed against the land;
• who can authorise additional borrowing;
• whether you're providing security only, or a guarantee as well;
• what the developer is putting at risk alongside you; and
• exactly how and when every mortgage, caveat and charge comes off your title.

If the property already carries a loan, bring your existing lender into the conversation early.

A worked example (illustrative)

Say your property is agreed at $700,000 going in. The project completes:

Split that $300,000 evenly and you receive another $150,000 — a total of $850,000. Better than a $700,000 sale.

Now let costs run $150,000 over. The profit halves to $150,000, and your total drops to $775,000. Push costs further, or sell the homes for less, and the profit can disappear. In a genuinely bad result, there may not even be enough to return your full land value once the lender has been repaid.

If you're bringing the money

You have cash, borrowing capacity, or both. A partner has the site and the skill to run the project.

What comes out before "profit"

Ask exactly what is deducted before the profit you're splitting is calculated:

• a development or project-management fee;
• the margin earned by any building company related to the developer;
• finance-arranging or acquisition fees;
• sales and marketing fees paid to a related agency; and
• interest on money the developer has contributed.

None of these are automatically unreasonable. Lenders often expect an experienced project manager to be paid. They simply have to be disclosed, and already in the feasibility, before you agree a split.

Know where you rank

The project's lender almost always ranks ahead of you. If a bank holds a first mortgage, it is repaid in full before any profit reaches anyone. Your money sits behind theirs. That is the trade for a profit share instead of an interest rate.

Work out what you actually hold. Equity in a project company? Units in a trust? A contractual right to a share of the result? Is anything secured in your favour, or are you unsecured?

A worked example (illustrative)

Many people imagine development makes millions, but that is unrealistic on a small residential development. As a rough sense of scale, a new dwelling tends to return between $40,000 and $100,000 of total project profit. So a three-dwelling site might make $120,000 to $300,000 in total.

Say you put in $400,000 of capital and the borrowing capacity in return for a 50% profit share. The project makes $250,000. It might reach you like this:

Your $400,000 comes back first. Then you take half of the $250,000 profit — $125,000. That's $525,000 in return for $400,000 in.

Now let it go badly. If costs run over or the homes sell for less, the money to distribute shrinks. It wipes out the profit first, then eats into your capital. If only $350,000 is left, that's all you get back — a $50,000 loss. The lender is repaid in full before you see a dollar, so a very bad project can leave less again.

What happens if costs run over

Settle this before it happens, not after. The agreement should say:

• who has to put in more money;
• what happens if you can't, or won't;
• whether your share is diluted if another party covers it;
• whether extra contributions earn interest or rank ahead of profit; and
• whether more can simply be borrowed against the project.

Who you're backing

The site matters. The person running it matters more. Ask to see work of a similar type and scale, and ask to speak with previous partners.

If you're one of several investors

Where a developer pools money from a number of passive investors, financial-services and managed-investment-scheme laws can come into play. Calling the arrangement a "joint venture" doesn't automatically put it outside those rules. If you're being invited into a group, ask how that has been handled.

Risks

The two sections above were side-specific. The rest is for everyone. All development projects carry risk. Below are the bigger ones. A JV adds one more: people. The best thing you can do is go in well informed, stay diligent, and work with good people.

• Market risk: end values can fall between commitment and completion.
• Cost risk: construction pricing and interest rates move.
• Time risk: approvals and builds run long; most projects span 12–24 months.
• Partner risk: the big one. You're bound to these people for the life of the project — competence and character both matter. One of our partners describes a JV as a marriage, and that's about right.

Questions to ask any developer before you sign

1. Show me the full feasibility. End values, every cost line, margin, assumptions. If it's "commercially sensitive," or written on the back of a napkin, walk — no, run away!
2. What do I see during the project? The gold standard is access to project documents and financials as they happen — not a quarterly summary.
3. What happens if costs blow out? Who funds overruns, and in what order do parties get paid at the end?
4. What's your track record? Real projects you can drive past. (Ours are here.)
5. Who papers the deal? Proper legal documentation, with time built in for your independent advice.

Get your own advisers

The lawyer who drafts the JV documents usually acts for the developer or the project entity — not for you. Have your own solicitor and accountant, and pick ones who understand property development, not just ordinary conveyancing. Tax, GST and stamp duty all turn on the structure, and the wrong structure is expensive to unwind after contracts are signed.