Construction and real estate sales
A separate vehicle is established, over which two parties have joint control. Neither the legal form nor the contractual terms of the joint arrangement give the parties rights to the assets or obligations for the liabilities of the arrangement. Other facts and circumstances are as follows:
- the purpose of the joint arrangement is to construct a residential complex for selling residential units to the public;
- contributed equity by the parties is sufficient to purchase land and raise debt finance from third parties to fund construction; and
- sales proceeds will be used as follows (in this priority):
- repayment of external debt; and
- remaining profit distributed to parties.
Analysis
Since there is a separate vehicle, and because neither the legal form nor the contractual terms of the joint arrangement give the parties rights to the assets or obligations for the liabilities of the vehicle, the preliminary analysis indicates that this is a joint venture. The fact that the parties are the only source of cash flows at inception is not conclusive whether the facts and circumstances indicate that the parties have rights to the assets, or obligations for the liabilities. That is, more information and judgement is needed before concluding if this is a joint venture or a joint operation.
Variation The contributed equity is not sufficient to purchase the land and raise debt financing. There is an expectation, or requirement, that the parties will contribute cash to the joint arrangement through a series of cash calls. The fact that the parties are expected to be a source of cash flows is not conclusive whether the facts and circumstances indicate whether the parties have rights to the assets, or obligations for the liabilities. That is, more information and judgement are needed before concluding if this is a joint venture or a joint operation.