Joint Development Agreement (JDA) between landowners and developers is one of the most common models for land monetization. As the name suggests Joint Development Agreement (JDA) is a partnership agreement between landowners and developers for a long period with large stakes involved from the parties. This article will help landowners to be abreast of key terms and conditions of this agreement which they need to be aware of and pay required attention to it.
Once landowner is clear about the usage of the property and partner, the first step is to sign a term sheet or Memorandum of Understanding (MoU) before development partner commences the due diligence process. It is recommended to have following points agreed at the time of execution of term sheet/ MoU in order to avoid any surprises during JDA negotiations.
1. Type of JDA: There are two types of JDAs – Area Sharing and Revenue Sharing. In Area Sharing JDA the agreed share of saleable area is allocated to the landowner post receipt of development approval through area sharing agreement. Whereas, in Revenue Sharing agreements, landowners are entitled for agreed percentage of the project revenue through escrow accounting mechanism.
2. Deposits: There are two types of deposits: Non-refundable (also known as ‘Goodwill’) and Refundable deposits. Landowners need to be known the payable deposit is refundable or non-refundable or combination of the two.
3. Sharing Ratio: The most important commercial term of this agreement. It is important to know what project revenue would be shared with landowner for both type of agreements. Generally, in area sharing it is called base sale price and for revenue sharing it is sharable project revenue.
4. Base Sale Price or Sharable Project Revenue: The Base Sale Price or Sharable Project Revenue includes base sale value, income from floor rise, sale of car parks and any other preferential location charges. It does NOT include charges such as One-Time electricity and water deposits, club house membership fee, legal charges, maintenance deposits, sinking fund and GST payable by customers.
5. Marketing & Sales Charges: Landowners need to pay a fee towards marketing & sales if units are sold through development partners. It is usually between 4% to 7% of the base sales charges/ shareable project revenue.
6. Project Timelines: Development partners usually categorize project timelines into two components: Timelines for availing project approval (receipt of RERA) and project completion from receipt of RERA. Project Completion is defined as receipt of Occupancy Certificate (OC).
7. Commercial terms for unsold units: Post receipt of OC, for area sharing agreements, the unsold units are registered in landowners name, therefore the payments towards, One Time Electricity Deposit, one time water deposits, club house membership fee, legal charges, maintenance deposits, sinking fund and GST to be incurred by landowners. For revenue sharing, both parties can continue the project sales for a defined period before going for area settlement agreement for unsold unit. However, in revenue sharing agreements as well, post receipt of OC, landowners are entitled to pay charges towards GST for unsold units.
1. Mortgage Rights: Development partners raise construction loans for project funding purpose. It is suggested to clarify this right upfront in term sheet/ MoU. Development partner can mortgage its project right restricted to his share only but only on receipt of project development approval (RERA) and not prior to it. Also, landowners can be allowed to mortgage its project share post receipt of approval.
2. Project delay penalty: If the project is delayed beyond agreed project timelines with curation period of 6 months, landowners need to be compensated at a fixed rental fee towards unsold units.
3. Exit for non-start of the project: landowners can have a clause which gives them a right to terminate the JDA if project does not start for a reasonable period post signing of the JDA.
4. Project Specification: Generally, minimum sale price/ launch price is discussed and agreed between the two parties, but it is not mention in JDA due to regulation charges applicable on execution of JDA and price is market driven. It is recommended to review and include a detailed project specification section to the agreement copy to protect the quality of the product.
5. Rights under GPA: A GPA is also executed along with JDA. This GPA gives development partners rights to avail project approval, construction, and project sales. For revenue sharing agreements, development partner will also have the right to landowner’s share units sold through developer.
It is advisable to involve a real estate transaction professional, legal counsel, and tax advisor for such transactions. It helps landowners to optimize their returns and protects from many transaction risks.
Meraqi is a Strategic Real Estate Transaction and Advisory firm. We provide most relevant opportunities and partners for land. MERAQI’s extensive market knowledge and geographical reach optimize transaction risk and return. Our expertise expands beyond land assessment to formulation of joint developments, joint ventures, and development management structures for clients.
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