Joint contracts are a traditional instrument of Spanish commercial law that has gained importance in the real estate sector as a vehicle for real estate investment and as a formula for financing real estate projects.
Through this arrangement, the investor (or participant) contributes capital, assets or rights to the operation carried out by a developer (or manager), with the aim of sharing the economic results, whether profits or losses. All this without the need to set up a company and without the investor being hidden from third parties.
This model has become increasingly important, especially at times when bank finance is more selective or expensive and developers need flexible capital to undertake new residential, office or shopping centre developments.
On the other hand, these contracts offer investors the opportunity to access the property market without having to actively intervene in its management, with the potential for higher profitability than a fixed-rate loan.
This formula is also attractive to landowners who, instead of selling their assets, wish to participate in the future capital gains of the project. In this way, they contribute land or a building to the developer and receive a percentage of the final profits through the silent partnership agreement. In this way, the synergies between the property owner and the property specialist are maximised, with a fair distribution of risk and reward.
The main characteristics of joint account agreements, their legal framework, their advantages and risks, as well as practical recommendations for investors and developers interested in using them as a means of financing and diversifying real estate projects in Spain, are set out below.
1. Nature and legal regulation of joint account contracts
Articles 239 to 243 of the Commercial Code (https://www.boe.es/buscar/act.php?id=BOE-A-1885-6627) provide the basis for joint venture agreements. According to this framework, one or more participants may participate in the activities of a manager by contributing resources and assuming the agreed share of favourable or unfavourable results. Unlike companies, no independent legal entity is created: the manager is the only one who acts in external transactions, while the investor remains in the shadows.
As the specific regulation is very concise, the content of each contract depends to a large extent on the autonomy of the will, which allows enormous flexibility in agreeing terms. The general rules of civil and commercial law apply in a complementary manner. Similarly, no registration or special formalities are required beyond those agreed by the parties, although in practice it is advisable to document the contract in writing, or even to have it notarised, in order to ensure greater legal certainty.
2. Structure and operation of joint ventures
In the real estate context, the developer manages the acquisition of the land or building, obtains building permits and markets the apartments or premises. To do this, the developer needs additional funds and turns to the investor, who contributes capital or assets (e.g. land).
The silent partnership agreement defines the internal relationship between the two: the developer manages the project, while the investor plays a passive role, limited to receiving information and sharing in the profits (or bearing part of the losses).
The manager is accountable to third parties, as the silent partner remains hidden and does not appear in public documents. This feature, in addition to preserving the confidentiality of the investor, limits his liability in the event of possible claims by suppliers or creditors.
From an accounting point of view, the developer will include the project’s expenses and income in its accounts and will have to provide the investor with an account at the end of the financial year or at the end of the transaction.
3. Advantages as a property investment vehicle
1.- Flexibility and speed: the contract can be easily adapted to the characteristics of each development without the need for company incorporation formalities. This speeds up the entry of investors when a market opportunity arises.
2.- Simple structure: No administrative bodies or minimum share capital are required. The investor does not appear in the commercial registers, thus preserving the confidentiality of his investment.
3.- Limited liability: the participant only risks what he invests, without being liable with his personal assets for the debts of others.
4.- Potential benefits: if the property market offers attractive margins, the profitability can exceed that of a conventional loan, as the investor participates in the final capital gains.
5.- Complement bank financing: The developer can combine a mortgage loan with the entry of investors through contracts in participation accounts, balancing own and third party resources.
4. Risks and considerations for investors Lack of guarantee of repayment:
1.- The investor assumes the risk of the activity and may lose all his capital if the project fails.
2.- Dependence on the manager: Success depends largely on the capacity and reliability of the promoter. It is essential to analyse their track record and agree sufficient rights of information and audit.
3.- Promoter insolvency: The insolvency of the promoter can seriously hamper the recovery of the investment.
4.- Low liquidity: It is difficult to sell the interest before the end of the project as there is no secondary market for this type of contract.
5.- Necessity of a detailed contract: as it is a short regulatory figure, everything relating to the distribution of profits, the calculation of costs or the form of liquidation must be agreed in detail.
5. Comparison with other figures and fit with project financing
Compared with structures such as the creation of a joint venture or the formalisation of a loan, profit-sharing agreements offer a more flexible and less bureaucratic model.
However, they lack certain guarantees that creditors might have and they do not offer the political rights that a partner would have. Their choice therefore depends on the specific needs of the developer and investor, as well as their risk appetite and preferences in terms of control or confidentiality.
In practice, this modality has been key to the financing of real estate projects during economic periods of credit scarcity, allowing national and foreign investors to participate in specific developments. It is also very common for the owner of a plot of land not to sell it to the developer, but to “share” in the future profits by contributing the land to the joint account.
6. Practical example
Let’s imagine that a property developer wants to build a development of 15 houses. The total budget is 3 million euros. The bank is financing 1.5 million and the developer has 1 million of his own. Half a million is needed to cover the remaining costs. A private investor is interested in participating and signs a contract for joint participation, contributing the 500,000 euros.
In return, it is agreed that when the houses are sold, the investment will be recouped first and then the net profit will be distributed 40% to the investor and 60% to the developer. If the project is successful and generates a profit of one million euros, the investor will receive 400,000 euros on top of his initial contribution.
If the operation is less profitable or even makes a loss, the investor would take the risk of not recovering part of his capital.
7. Relevant tax aspects
From a tax point of view, the investor normally pays income tax or corporation tax on profits, depending on the legal nature of the investment and the applicable rules. For its part, the manager considers the payments made to the investor as a business expense. In addition, the creation of the silent participation agreement does not involve the tax costs of a capital increase and in many cases is not subject to taxation on property transfer or corporate transactions.
However, each case may require a detailed analysis, especially in the case of foreign investors and possible international double taxation treaties.
8. Keys to drafting a solid contract
The validity of this figure is based on a clear contract that includes
- A detailed description of the project (object, location, deadlines).
- The amount and form of the contribution (cash, land, etc.).
- Method of calculating profits and deductible expenses.
- Percentage distribution of capital gains and allocation of losses.
- Manager’s duties, including periodic accountability.
- Control and veto rights over relevant decisions.
- Liquidation procedures at the end of the development.
- Possible grounds for early termination and compensation.
- Mechanisms for dispute resolution (courts or arbitration).
Incomplete wording can lead to controversy in the event of an imbalance in results or unexpected expenditure. It is therefore advisable to seek legal advice to ensure that all appropriate safeguards are included in the clauses.
9. When should this formula be chosen?
Participation account contracts are ideal when
- Funding is sought for a specific development without creating new companies or diluting the promoter’s ownership.
- The investor is looking for a potentially higher return than a loan, while assuming some of the property risk.
- The discretion not to appear in public or to third parties is valued.
- The landowner prefers to link his remuneration to the ultimate capital gain rather than receive a fixed price at the outset.
However, it is essential that both parties are clear about the scenario they are facing, with its potential benefits and possible losses.
10. Differences with Anglo-Saxon structures and usefulness for foreign investors
For investors from common law jurisdictions, the participation account resembles a joint venture agreement without the obligation to register a company. The figure of the hidden investor differs from that of the limited partner, as there is no additional legal personality in Spain. For practical purposes, however, the same distribution of profits and limitation of liability is achieved.
Many international funds have taken advantage of this figure to invest flexibly in Spanish developments, trusting in the security provided by commercial legislation. Nevertheless, it is essential to have a good contract that details the conditions to avoid any uncertainty.
With proper planning, this formula for financing property projects can be very profitable for both developers who want to share the risks and investors who are looking for higher returns.
If you are considering joint account contracts as a real estate investment vehicle or as a method of financing real estate projects, don’t leave your strategy to improvisation. At QUIKPROKUO we have a team specialising in commercial and real estate law with extensive experience in structuring agreements and tax planning. Our firm offers a comprehensive service ranging from contract drafting and negotiation to tax optimisation and dispute management.
Contact us for personalised advice and to ensure that your silent partnership agreement meets all legal guarantees, safeguards your interests and maximises profitability.
