Development Finance vs Joint Venture Finance
Conventional development finance provides debt that must be repaid from the project exit. Joint venture finance introduces an equity partner who may contribute capital in return for an agreed share of project profit, risk and decision-making.
Development finance
May suit a developer able to contribute the required equity, meet lender criteria and repay the facility, interest and fees while retaining the remaining project profit.
Joint venture finance
May suit a viable project where the developer needs additional equity, experience or strategic support and is prepared to share profit and control with a funding partner.
Should you borrow the capital or share the project?
Development finance and joint venture finance can both help deliver a property project, but they create very different commercial relationships.
Conventional development finance is primarily a borrower-and-lender relationship. The developer contributes equity, the lender provides an agreed facility and the debt must be repaid under the finance agreement.
Under a joint venture, another party contributes capital, assets, expertise or a combination of resources in return for an agreed economic interest in the project.
A JV partner may share the potential upside, but will normally expect agreed rights over important decisions, reporting, budgets, project changes and the eventual exit.
The appropriate route depends on available equity, experience, project margin, appetite for debt, willingness to share control and the quality of the proposed partnership.
Development debt and joint venture equity explained
What is conventional development finance?
Development finance is secured borrowing designed around a construction, conversion or major refurbishment project.
The lender may provide an initial advance towards the site or property, followed by staged releases against eligible works.
The developer will normally need to provide:
- An agreed equity contribution
- A detailed project appraisal
- Planning and consent information
- A cost plan and contingency
- Relevant development experience
- A credible sale or refinancing exit
What is joint venture finance?
Joint venture finance normally involves an investor or strategic partner contributing capital to a project in return for an agreed share of its economic outcome.
The arrangement may sit alongside senior development debt or form part of a wider structure in which the partner contributes land, capital, expertise or delivery capability.
A JV structure may involve:
- An investor and developer
- A landowner and developer
- Two development businesses
- An equity partner alongside a senior lender
- A special purpose project company
- A detailed shareholder or JV agreement
Development finance vs joint venture finance
| Feature | Development finance | Joint venture finance |
|---|---|---|
| Funding type | Secured debt | Equity or partnership capital |
| Developer equity | An agreed borrower contribution is normally required | A partner may provide some or all of the required equity, subject to the arrangement |
| Return to funder | Interest, fees and repayment of the principal | Commonly an agreed profit share, preferred return or combination of returns |
| Control | The developer normally retains operational control subject to lender covenants | Important decisions may require partner approval |
| Project risk | The borrower remains responsible for repaying the debt under the facility | Economic risk and reward may be shared between the partners |
| Profit retained | The developer retains residual profit after repaying finance and project costs | Profit is distributed under the agreed JV waterfall |
| Documentation | Loan agreement, security documents and project conditions | JV, shareholder or partnership documentation plus any senior lending documents |
| Typical use | Projects where the developer has sufficient equity and delivery capability | Projects requiring additional equity, skill or strategic input |
Swipe or scroll horizontally to view the full comparison table.
The central difference
Development finance creates a debt obligation. A joint venture creates a partnership and normally gives the funding partner an economic interest in the project.
Six important differences to consider
Capital contribution
Conventional lenders normally expect the developer to contribute an agreed amount of equity.
A JV partner may contribute capital to fill an equity gap but will expect a commercial return and contractual rights.
Cost or profit share
Development debt has an agreed interest and fee structure.
JV finance can appear to reduce fixed debt, but sharing a successful project's profit may ultimately cost more than conventional finance.
Control
A lender imposes facility conditions but does not normally become a co-owner of the project.
A JV partner may receive approval rights over budgets, appointments, changes, borrowing, sales and distributions.
Risk allocation
Development debt remains repayable in accordance with the facility, even if the project underperforms.
Equity partners can share economic risk, but the agreement may still contain guarantees, indemnities or developer obligations.
Experience
A lender will assess the developer's ability to complete and exit the project.
A JV can combine capital from one party with project delivery, planning or construction expertise from another.
Decision-making
A borrower can usually make operational decisions within the loan covenants and approved project plan.
A JV requires an agreed governance process, including how disputes, deadlocks and project changes will be handled.
How can a development joint venture be structured?
Investor and developer
The investor contributes capital while the developer sources, manages and delivers the project.
The agreement should define capital priority, management responsibilities, fees and the eventual profit split.
Landowner and developer
A landowner contributes a site or property while the developer contributes planning, delivery and project-management expertise.
The structure must establish how the land is valued and how the parties participate in the completed scheme.
Equity alongside senior debt
A senior lender provides secured development finance and the JV partner contributes some or all of the required equity.
The equity and debt documents must work together, particularly around security, distributions, default and project control.
A JV is not simply “100% finance”. It is a commercial partnership. The developer may give up a significant share of profit, control or future decision-making in exchange for the partner's capital and support.
When might each option be suitable?
Development finance may be suitable when:
- The developer has the required equity contribution
- Relevant development experience can be demonstrated
- The developer wants to retain the residual profit
- The project can support the debt and finance costs
- The exit provides a credible route to full repayment
- Sharing project control is not commercially desirable
Joint venture finance may be suitable when:
- The project is viable but developer equity is limited
- A landowner wants to participate in the development upside
- The developer needs additional strategic expertise
- The project is larger than the developer could deliver alone
- The parties bring complementary skills and resources
- The developer accepts shared control and profit
Is joint venture finance cheaper than development debt?
Not necessarily. The two structures do not have directly comparable pricing models.
Conventional development finance normally has defined interest, fees and repayment obligations. These costs can be modelled against the anticipated drawdown and project programme.
A JV partner may not charge conventional interest on its equity contribution, but normally expects an agreed return from the project's success.
On a strongly performing scheme, the value of the profit share can exceed the cost of conventional debt. On an underperforming scheme, an equity partner may share some economic risk, subject to the precise agreement.
Compare the following:
- Developer equity required under each structure
- Interest, fees and retained finance costs
- Preferred return payable to the JV partner
- Project-management or development-management fees
- The proposed profit-sharing waterfall
- Whether the partner's capital is returned first
- Decision-making and consent rights
- Guarantees, warranties and indemnities
- The effect of delays and cost overruns
- The developer's retained profit under each outcome
Model more than one outcome. Compare the structures under the base case, a delayed project, a cost overrun and both lower and higher sales values.
Example: a developer acquiring a residential site
The project
Consider a developer planning a multi-unit residential scheme with a land purchase, construction budget and completed sales exit.
Development finance route
- Developer contributes the required equity
- Lender provides the agreed development facility
- Build funding is released in stages
- Debt, interest and fees are repaid at exit
- Developer retains the remaining project profit
Joint venture route
- Partner contributes agreed project equity
- Senior development debt may also be used
- Developer manages delivery under the JV agreement
- Capital and agreed returns are distributed at exit
- Remaining profit is shared between the partners
The JV route may allow the developer to proceed with less personal capital, but the partner will normally share the project's economic upside and receive contractual involvement in material decisions.
What should a joint venture agreement address?
Project and financial terms
- Initial capital contributions
- Responsibility for cost overruns
- Further funding obligations
- Development-management fees
- Capital repayment priority
- Profit and loss allocation
- Distribution waterfall
Control and exit terms
- Roles and responsibilities
- Reserved decisions requiring consent
- Reporting and meeting requirements
- Project changes and budget approval
- Deadlock and dispute procedures
- Default and removal provisions
- Sale, refinance and dissolution arrangements
Obtain independent legal and tax advice
JV arrangements can create significant legal, tax, control and commercial consequences. Each party should understand the structure, documentation and risks before contributing land, capital or services.
Development and joint venture finance misconceptions
“Joint venture finance is free money.”
No. The partner normally expects an agreed economic return and may receive significant rights over the project.
“A JV partner removes all developer risk.”
No. The developer may retain project-management obligations, warranties, guarantees and responsibility for contractual breaches.
“Development finance always requires full cash equity.”
Not necessarily. Lenders assess the proposed contribution, land position, additional security, costs and project structure according to their criteria.
“A 50/50 profit split is standard.”
No. Profit-sharing terms are negotiated and can depend on capital, experience, risk, responsibilities and bargaining position.
“The partner will remain passive.”
Do not assume this. The partner's decision-making, reporting and approval rights should be expressly documented.
Information to prepare before seeking funding
Development finance information
- Site and acquisition details
- Planning permission and conditions
- Detailed cost plan and contingency
- Development programme
- Professional-team details
- Developer experience
- GDV evidence
- Sale or refinancing exit
Additional JV information
- Capital required from the partner
- Developer's proposed contribution
- Roles each partner will perform
- Proposed ownership structure
- Profit-sharing proposal
- Decision-making framework
- Cost-overrun responsibilities
- Proposed exit and distribution waterfall
Key takeaway
Conventional development finance is secured debt. It can allow a developer with sufficient equity and experience to retain control and the residual project profit after repaying the loan, interest, fees and project costs.
Joint venture finance normally introduces an equity partner who contributes capital or other resources in return for an agreed share of the project's return and contractual involvement in important decisions.
The decision should compare equity availability, total economic cost, retained profit, control, risk allocation, partner suitability and the strength of the legal agreement.
Not sure whether to borrow or bring in a JV partner?
Shadowfax Funding Solutions can help review the project, equity requirement, development facility, anticipated returns and funding structure before suitable options are explored.
Development finance vs joint venture finance FAQs
What is the main difference between development finance and JV finance?
Development finance is normally secured debt that must be repaid under the loan agreement. JV finance normally involves a partner contributing equity or other resources in return for an agreed economic interest in the project.
Does joint venture finance require developer equity?
This depends on the structure and partner. A JV partner may provide some or all of the required project equity, but may still expect the developer to contribute cash, land, fees, expertise or another demonstrable commitment.
Does a JV partner receive a share of the profit?
Commonly, yes. The return may include a preferred return, profit share or another agreed distribution arrangement. The precise terms should be documented.
Is JV finance cheaper than development finance?
Not necessarily. Development debt has interest and fees, while JV finance can require the developer to surrender part of the project's profit and control.
Can development finance and JV equity be used together?
Potentially. A senior development lender may provide secured debt while the JV partner contributes equity. The debt and equity arrangements must be compatible and properly documented.
Does a JV partner control the development?
The level of control depends on the agreement. A partner may receive consent rights over budgets, appointments, material changes, borrowing, sales and distributions.
Can an inexperienced developer obtain JV finance?
Potentially, but relevant delivery capability remains important. A partner may require an experienced project team, contractor or development manager to support the proposal.
What happens if a JV project makes less profit than expected?
The result depends on the distribution waterfall, capital priority, loss-sharing provisions, guarantees and other terms in the JV agreement.
Does a joint venture need a separate company?
Some JVs use a special purpose company, while others may use a partnership, LLP or contractual arrangement. Legal and tax advice should be obtained on the appropriate structure.
Related property finance resources
This guide provides general information and does not constitute financial, investment, tax, legal, partnership or property-development advice. Joint venture terms, profit sharing, control rights, security, tax treatment, pricing and lending availability depend on the parties, project, legal structure and agreements. Independent legal and tax advice should be obtained. Property may be repossessed if secured borrowing is not repaid. Shadowfax Funding Solutions Limited is a credit broker, not a lender.