Presenting a live 90-minute webinar with interactive Q&A Structuring Programmatic Real Estate Joint Ventures: Structures, Deal Sharing and Exclusivity, Pooling Variations Negotiating Key Deal Terms From Sponsor and Equity Investor Perspectives THURSDAY, MAY 19, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Robert T . Buday, Partner, Latham & Watkins , Chicago Joshua P . Hanna, Partner, Kirkland & Ellis , Chicago The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Programmatic Real Estate Joint Ventures Robert Buday Joshua P. Hanna Latham & Watkins LLP Kirkland & Ellis LLP Chicago, Illinois Chicago, Illinois robert.buday@lw.com joshua.hanna@kirkland.com
Overview Of Trends In Market • Programmatic joint ventures are on the rise • Favorable economic conditions • Abundance of capital searching for deal flow • Maximizes efficiencies for Sponsors and Investors • Risk spreading • Allows parties to establish programmatic debt structures • Investor Considerations & Motivations • Strong Sponsors survived downturn • Build strategic relationships with Sponsors • Offers direct exposure to particular assets (and if passive Investor, can obtain such exposure without significant devoted resources) • ROFO on deal flow of Sponsor 6
Overview Of Trends In Market • Sponsor Considerations & Motivations • Provides diversification of capital • Public Sponsors like REITs can utilize JV platforms to minimize dilution when stock values are suppressed • Public Sponsors take advantage of shifts in market when private investors offer higher valuations • Sponsors need to transact quickly and show credibility • Offers credibility to Sponsor if become branded with institutional capital • Natural evolution from real estate operator to fund manager • Allows Sponsors to build back office infrastructure to support bigger platform 7
Programmatic JV Structures • Holding Company Structure • Upper Tier Joint Venture Agreement • Acquire Properties through separate subsidiary entities • Typically includes crossing of deal economics and portfolio-level exit rights • Holding company may act as guarantor based on JV balance sheet • Strategic Alliance / Framework Agreement • Framework Agreement establishes parameters for contemplated separate investments • May include exclusivity and “first look” provisions • Deals documented separately but forms and primary deal terms may be agreed under governing framework 8 • Transactions are generally independent from one another
Programmatic JV Structures • Investor objectives • Leverage operational expertise of Sponsor • Maintain control through governance and investment approval • Limit Sponsor authority to Administrative Member • Shift risk for debt recourse and performance requirements to Sponsor • Reduce risk of uneven returns by pooling returns • Sponsor objectives • Seek investment discretion and control • Want committed capital by Investor • Want to limit Sponsor co-invest • Prefer project by project promotes to maximize returns and 9 isolate losses
Programmatic JV Structures • General Counterparty Considerations • Source of capital and investment limitations • Need to match investor profile with business plan of JV (i.e. consider limitations of REIT investor, pension fund investor, foreign investors, etc.) • Consider operating history of investor with other Sponsors and seek referrals from partners on troubled deals • Regulatory issues of counterparty (i.e. CFIUS) • Life cycle of counterparty • Counterparty cost of capital • Operational capabilities of counterparty • Desire for tax distributions • Public disclosure requirements 10
Deal Sharing And Exclusivity • Exclusivity – What Deals must be Presented to JV? • Time Period / Maximum Commitment • Geography • Asset Class • Size • First Look and Capital Investor Approval Rights • How much discretion within deal parameters • Timing and diligence requirements • Sponsor rights to pursue rejected deals • “3 Strikes” or other exclusivity termination rights • Pursuit Costs • What is covered • Diligence expenses, earnest money, legal or other fees, overhead • How are costs shared at various stages of a proposed transaction • Pre- approval, initial approval, final approval, closing or “Dead Deal” 11
Pooling Of Economics • Distribution of Returns • Deal by Deal vs. Portfolio Waterfall • Sponsor prefers to emphasize “winners” • Capital Investor prefers to absorb “losers” across portfolio IRR • Cost Overruns or Pursuit Costs may be returned in waterfall • Timing of Promote Payments • Earned and paid on each deal vs. after portfolio hurdles achieved • Advance / Crystallization of Promote • Distribution vs. Recalibration of Interests • Interim Lookback • Clawback and Make-Whole • Timing, caps and tax considerations • Creditworthy guarantor of clawback obligations 12
Governance Issues • Day-to-Day Management and Control • Many ways to manage JV, including: • GP or Managing Member, with LPs / Non-Managing Members granted certain approval rights over certain defined “major decisions ” • Board of directors appointed by members / partners (with approval over certain defined “major decisions”), and designated officers running the day to day activities of the venture • Investors seek to minimize Sponsor authority – Administrative Member • Scope of Duties of GP / Managing Member / Officers • Sponsor will generally control day-to-day and construction activities • Capital Investor will push for control of Major Decisions affecting portfolio or material aspects of each Project • Consider which Member(s) may propose actions 13
Governance Issues • Major Decisions • Major Decisions (e.g., additional capital; new participants; change in control of venture; change in scope of venture; budgeting; loans; liens; acquisitions; dispositions; mergers or reorgs; change in form or tax treatment; IPO; material contracts; bankruptcy; dissolution; etc.) may require consent of Non-Managing Members or Board • Various matters allowed if pre-approved in Budget / Operating Plan / Business Plan, typically subject to permitted variances • Budget / Operating Plan / Business Plan • Adoption • Amendment • Expenditure or Activity Outside of Budget or Plan (Plus Variance) 14
Financing Guarantees And Related Issues • Consider programmatic debt structure for JV and need to finance multiple properties • Guarantees — who is responsible? • Transfer and removal provisions (if any) need to address ongoing responsibility • Need to consider likely disconnect between JV control rights and liability under guarantees • Backstop / Contribution obligation of Investor • Construction Guarantees vs. Nonrecourse Carveouts • Certain debt covenants (e.g., transfer restrictions) must also be addressed in JV agreement • JV transfer and removal rights should be incorporated into loan documents as permitted transfers • Sponsor approval rights or indemnity over actions that trigger 15 recourse liability
Default Remedies And Removal Rights • Typical Default Events • Bad Acts (fraud, gross negligence, felony, theft, etc.) • Failure to Contribute Capital • Key Person Event • Breach of Affiliate Agreements • Unpermitted Transfers • Bankruptcy • Additional Default Events • Fail to achieve performance thresholds • Default by JV under loan documents or other material agreements of JV • Removal as Managing Member under other JV agreements 16 • Failure to maintain insurance
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