Joint ventures for landowners: keeping the development upside

If you sell land with planning permission, you take the land value and the developer takes the development profit. For many landowners that's the right trade: a clean sale, money in the bank and no exposure to the build. Some would rather keep a share of the upside, and are prepared to carry some of the risk to get it.

Below I've set out how the main routes work in practice, from the point of view of a builder that buys land, enters joint ventures and builds out schemes. It isn't legal or tax advice. On a land deal you need both, from advisers who act for you alone, before you sign anything.

Three ways to deal with your land

Sell it. You get a price, the buyer takes the risk, and your involvement ends at completion. It's the simplest route and usually the lowest return. There are variations: a conditional contract that completes once planning is granted, or an option or promotion agreement, where a developer or land promoter takes on the cost of getting planning in return for the right to buy or a share of the sale. Each has its own terms on price, timing and who pays for what.

Enter a joint venture. You contribute the land, a developer contributes the expertise to plan, build and sell the scheme, and the profit is shared. You get more than the land value if the scheme goes well, and you carry part of the risk if it doesn't.

Build it out yourself. You keep all the profit and all the risk. You fund the scheme, appoint the designers and a contractor, and take the sales risk at the end. It suits landowners with finance, time and the appetite for it.

How a joint venture typically works

There's no single standard form, and the detail is always negotiated. In general terms:

• The land goes into the venture at an agreed value, which is recorded at the start
• The developer brings planning, design, building, project management and sales, and sometimes some or all of the funding
• Development costs are paid out of the project, often with the help of development finance
• When the homes sell, the proceeds repay the funding and the costs, the agreed land value is credited to the landowner in whatever order the agreement sets, and the remaining profit is split in the agreed proportions

The venture might be a straightforward contract between the two parties, or a separate company or partnership set up for the scheme. Which structure is right depends on the scheme, the funding and the tax position of each party.

Two consequences are worth understanding before you start. First, you're paid later than on a sale, often from the sales at the end. Second, if the scheme uses development finance, the lender will usually want security over the land. If the project goes badly, your land is part of what's at risk.

A joint venture is only as good as the agreement behind it. The time to settle what happens when things go wrong is before anything has gone wrong.

What has to be agreed in writing

• The value given to the land, and when and how you receive it
• Who funds what, and who pays if costs overrun
• How profit is defined, which costs come off first, and how it's split
• Who makes which decisions, and what happens if you disagree
• What happens if planning is refused, the market falls or one party wants out
• What security any lender takes, and over what
• How information is shared, so you can see costs and sales as they happen

None of these are unusual questions, and a developer who is reluctant to put the answers in writing is telling you something.

Tax and legal: take your own advice

How land is held, and how a deal is structured, can make a large difference to how your share is taxed. Depending on the arrangement, the same money might be treated as a capital gain or as income, and stamp duty land tax and VAT can also come into it. These are questions for a tax adviser who understands land, not for a builder and not for the other side's advisers.

The same goes for the agreement itself. Have it drawn up or reviewed by a solicitor who acts only for you, and give them enough time to do it properly.

Talking it through

We buy sites outright, enter joint ventures with landowners, and build out schemes. Which of those makes sense depends on the site, the planning position and what you want from it.

Send us the location and the title plan. Within five working days you'll get a free site appraisal setting out the residual land value and the build cost, which is the starting point for comparing a sale with a joint venture or building it out. Our post on residual land value explains how that figure is worked out, the build rates we use are on our cost guide, and more about the schemes we build is on our housing developments page.