Real estate joint ventures

Is a property partnership a joint venture or a joint operation?

Joint control means decisions about the relevant activities, such as buying, selling, letting and financing the property, need the unanimous consent of the parties sharing control. If one party controls the vehicle, it is a subsidiary; if an investor only has significant influence, it is an associate, also equity accounted. Where there is joint control through a company or partnership, the arrangement is a joint venture unless the legal form, the contract or other facts give the parties rights to the assets and obligations for the liabilities, for example where the vehicle sells all its output to the partners. That is rare for property companies, so most property vehicles are joint ventures.

How is a real estate joint venture accounted for?

With the equity method. The investor carries one investment line, its share of the JV's net assets, and reports its share of the JV's profit in one line. If a 50% JV earns rental profit of CU 8 million and a fair value gain of 12 million, the investor reports a share of profit of 10 million, with no rent, no valuation gain and no debt of the JV on its own lines. Many property groups therefore also report proportionately consolidated figures, showing their share of JV rents, properties and debt, as alternative performance measures.

What about buildings co-owned directly?

Where two investors own a building directly as co-owners, with no company in between, the arrangement is a joint operation. Each records its share of the building as investment property, its share of the rent and costs, and any liabilities it owes, applying its own accounting policies. See construction joint ventures for joint operations in contracting.

Real estate joint ventures: selling land into the JV

An investor sells a site carried at CU 10 million to a new 50:50 JV for cash of 16 million, its fair value. The JV will develop offices on it.

The investor recognises a gain of 3 million, the share of the gain attributable to its partner. The other 3 million is eliminated against the investment in the JV, because half the land is still, in effect, the investor's own. It is recognised as the JV sells the land or uses it up. The same rule applies the other way, when the JV sells property to the investor. If the land is sold inside a subsidiary rather than directly, IFRS 10 points to recognising the full gain while IAS 28 points to a partial gain; the IASB's amendment to resolve this has been deferred indefinitely, so practice varies and the policy should be disclosed.

Must the JV use the investor's accounting policies?

Yes, for equity accounting. If the JV holds its investment property at cost but the investor uses the fair value model, the investor adjusts the JV's figures to fair value before taking its share. Reporting dates should be aligned too, or the gap adjusted for significant events if it is three months or less.

What about shareholder loans to the JV?

Partners often fund property JVs with loans as well as equity. A loan is a financial asset under IFRS 9, with expected credit losses. If it is in substance part of the investment, for example because repayment is neither planned nor likely in the foreseeable future, it is a long-term interest: once the investor's equity investment has been reduced to nil by losses, further losses are absorbed by the long-term interest. IFRS 9 is applied to the loan first, and then the equity method losses.

How are promotes and unequal profit shares handled?

Many property JVs split profits in a waterfall: capital back first, then a preferred return, then a larger share, or promote, for the developer partner once returns pass a hurdle. The equity method share reflects these contractual entitlements, not just the ownership percentage. IFRS gives no specific method; some investors determine their share by asking how the JV's net assets would be distributed if it were liquidated at book value at each reporting date, an approach common under US GAAP.

What about fees charged to the JV?

Asset management, development management and leasing fees charged to the JV are revenue for the investor under IFRS 15. Where the JV capitalises a fee into the cost of a development, many investors eliminate their share of the profit on it until the JV sells or depreciates the asset, consistent with the rule for sales of assets.

What is disclosed, and how does US GAAP differ?

IFRS 12 requires the nature of the joint arrangements, summarised financial information for each material JV, and commitments such as undrawn funding. Under US GAAP, real estate ventures are usually equity accounted under ASC 323, the hypothetical liquidation at book value approach is common for waterfalls, and ventures where equity is insufficient may be variable interest entities, assessed for consolidation first. See real estate accounting and control under IFRS 10.

This guide is general information. It is not tax or legal advice for your situation.