Westfield and Stratford - JVs - the new form of financing?

Peter Bill, in his latest blog entry in the Estate Gazette (Westfield sells half of Stratford - more sales to come?) picks up on the announcement to the Sydney stock exchange that Westfield has agreed to sell a 50% interest in Stratford City, the part of the Olympic site which it is developing as its latest retail attraction in the UK.  The buyers are a Dutch fund and a Canadian pension fund.

This is yet another example of how developers have been turning to alternative sources of finance since the development finance market effectively dried up as a result of the credit crisis.  The truth is that joint ventures are not particularly new but they had gone out of fashion whilst developers were able to take out cheap development finance allowing them to keep significant profits to themselves rather than having to share them with partners.

What is clear now is that joint ventures are back with a vengeance and if you want to get in on the action you need to make sure you have a decent understanding of what you are getting into, what pitfalls to avoid and how to generally ensure that if the wheels come off you do not go over the edge of the cliff with your partners but can jump ship in an appropriate manner.

Some fundamental questions you need to consider when looking at entering into a joint venture include:

• how do I want to exercise control and be involved in the decision-making of the vehicle?  Depending on the type of vehicle decisions may be made at different levels and without the right controls in place you can lose control over important decisions; set the level of control too high and you risk paralysing the vehicle
• where should the vehicle be located? - there are likely to be significant tax implications depending on where a vehicle is located but beware of the effect decision-making can have on jurisdiction for tax purposes
• what are your long term intentions? - is it intended to hold the asset for a long time (i.e. as an investor) or is the intention to improve it and then dispose (i.e. as a trader)?  this can affect both the type of vehicle chosen and the jurisdiction
• Are there any deal specific issues? - some potential JV parties will have restrictions and/or preferences regarding the sorts of arrangement they can enter into.  REITs are a good example.
• Are there specific regulatory issues that make one type of vehicle more attractive? - bearing in mind the new Alternative Investment Fund Managers Directive this area needs special consideration and it will impact potentially on jurisdiction as well
• How will the vehicle be taxed and does this fit with your/partners' taxation? - some vehicles (e.g. partnerships) are generally tax transparent but this may not work for all investors

It is very difficult to change structure part way through agreeing a deal and so it is vital that you do your homework before jumping into bed.