Property development - partnership between original owner and investor - an option?

10 January, 2022
A good example here is the property of a family business which has been manufacturing on this site for decades. But changes in competitive circumstances and more restrictive framework conditions imposed by the legislator are making the site increasingly unattractive. As a result the decision is made to give up the long-standing business headquarters. But what to do with it? One obvious option would be to sell the property. However a sale would mean the definitive surrender of the land to an investor, including any potential value increase in the future. This doesn`t make the decision to relinquish any easier. And so in the discovery phase the decision often moves towards the owners realising the property development themselves.

However, the planning and implementation of a building project on a conservation site is not the simplest undertaking. A building project that deviates only slightly from previous planning regulations can turn into years of expensive procedures to secure building permits. This requires external experts with honed skills, players that few owners have come across in their previous collaborations. In such a partnership - potentially lasting years - there are diverse interests to be acceptably reconciled in the form of works or service contracts. For the client, rapid completion of the project has absolute priority. The contractor expects to receive an appropriate reward for his work performance within a reasonable timeframe. In the course of a generally longer-term collaboration, friction and conflicts are inevitable, starting with delays, which are often caused by third parties. Sometimes the challenge of a building project is simply underestimated. Resources abundantly available at the start are substantially used up. Major upheaval in the operations often cannot be ruled out. 

Possible conflicts of interest may however frequently be avoided if the goals and basic timetables of those involved can be broadly aligned. A partial sale of the property to someone involved in the building project can be create a deeper shared responsibility through the initiation of a joint building project. The original owner remains involved in developing the project through his residual ownership. The construction expert on the other hand exchanges his originally limited involvement for a broader and longer-term participation. The contractual foundation may be, for instance, a contract of sale in combination with a general contractor agreement. Changes in the timeframe can also create a more generous and flexible basis for overall pricing by the construction industry partner. Additional project components, such as incorporation of social housing, privately financed rental units or the sale of residential units, can be divided up between the partners according to their interests.

In principle a partnership on an equal footing is preferable. It is therefore generally not so sensible for a globally connected family office to form such a liaison with a modest locally-based enterprise. The risk is considerably greater here that the more powerful partner will at some stage massively overstep its sphere of interest than would be the case with enterprises of a similar size. It is not always possible to contractually regulate for all aspects of every eventuality.

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