Dan Hargreaves and Andrew Millar outline potential joint venture models, the opportunities for both the private and public sector, and key considerations before entering an agreement.

Local authorities continue to face significant pressure on budgets, and many are continuing to explore a more entrepreneurial approach to deliver transformational developments or regeneration projects.

One option for local authorities looking to successfully develop or regenerate land is to enter into a joint venture with a private sector partner. This is often structured as a corporate joint venture and presents opportunities for the private sector developer and authority, which uses its land to lever long-term investment from the developer.

Typically, a local authority will transfer land assets to the joint venture vehicle, in return for a loan note, with the private sector partner providing funding of equivalent value to the land, in addition to bringing its skills and access to finance.

If successful, the local authority will not only complete its development, but also generate a revenue receipt from its capital asset that can be used to fund future phases or other projects.

Another advantage of this model is that the local authority retains equal control over the development while sharing risk and reward. This is alongside accessing private sector expertise and investment.

A successful joint venture requires all parties to balance their individual interests, clearly set out the objectives of the project, commit sufficient resource and work collaboratively. The parties should appoint experienced advisers that understand the commercial drivers and issues involved.

Considerations

• With the private sector partner delivering works and services under the joint venture, the local authority will need to notify the market of the opportunity and run a competitive procurement to select its preferred partner in accordance with the Public Contract Regulations 2015. Best value and subsidy control requirements will also need to be satisfied.

• The choice of joint venture vehicle, in practice, comes down to whether a company limited by shares or a limited liability partnership (“LLP”) is most appropriate. Both structures allow members to ring-fence their liability and create bespoke corporate governance arrangements.

• The tax transparency of an LLP (i.e. the members are taxed not the LLP and SDLT partnership relief should be available on the land transferred into the vehicle) will usually see it as the vehicle of choice, although guidance, particularly around control over management, is required to avoid an LLP having to comply with rules about collective investment schemes.

• There are a number of funding considerations, starting with the initial contributions. As this usually involves the private sector partner contributing cash of equivalent value to the land transferred by the local authority, the timing of, and methodology for, land valuation is therefore of critical importance.

• The members must agree whether they are willing to contribute further funding, or whether third party funding is required. Where third party funding is taken, especially on larger schemes, it is common to see land held in and developed, on a phased basis, by different SPV subsidiaries of the main joint venture vehicle. This allows different funders to lend to, and take security over, different phases.

• The joint venture agreement will need to include detailed provisions relating to the distribution of profits at agreed stages. For example, to address what is the agreed priority of payments, whether a distribution be made before all/some loans are repaid and, if relevant, the ability of either member to retain funds in the joint venture to recycle for future phases.

• An appropriate control and governance structure will allow the members of the joint venture to maintain control whilst balancing, and sharing, risks and rewards.

• Aside from the financial risks and reward, a local authority will want to include controls over future development, whilst benefitting from a developer’s specific skills and knowledge. Understanding each other’s drivers and red-lines, and the local authority’s legislative constraints, is necessary to allow each party to make the right compromises and concessions.

• Further points to consider will include: the make-up of any board or executive committee; identifying the decisions that are reserved for the approval of all members; the term of the joint venture (which must accord with the duration of the development) and the ability of members to transfer their interests; the implications of being in default under any contractual obligations; and, critically, what happens in the event of a deadlock, where the parties cannot agree on a course of action. In such circumstances it is particularly important to a local authority not to lose control of the land it contributed.

The issues might be familiar, but each joint venture has its own commercial challenges and as a number of high-profile joint ventures have failed, careful consideration and appropriate advice is always required before local authorities commit themselves to a corporate joint venture.

This article features in Shoosmiths’ new report: Operating in living