and Exclusivity, Pooling Variations Negotiating Key Deal Terms From - - PowerPoint PPT Presentation

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and Exclusivity, Pooling Variations Negotiating Key Deal Terms From - - PowerPoint PPT Presentation

Dec 20, 2023 350 likes •562 views

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

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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

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, MAY 19, 2016

Robert T . Buday, Partner, Latham & Watkins, Chicago Joshua P . Hanna, Partner, Kirkland & Ellis, Chicago

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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

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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

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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

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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

  • Transactions are generally independent from one another

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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

isolate losses

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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

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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”

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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

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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
  • ver 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

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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

  • r 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)

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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

recourse liability

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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
  • Failure to maintain insurance

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Default Remedies And Removal Rights

  • Customary Remedies
  • Consider limitations on triggers if not occur with respect to JV nor

have MAE on JV

  • Consider cure rights (acts committed by employee v. key person, acts

not related to JV, etc.)

  • Removal as Managing Member/ General Partner
  • Removal as property manager
  • Loss of Promote by Sponsor
  • loss of entire promote or percentage share
  • retain promote if after investment period
  • Punitive Dilution of non-contributing member
  • Acceleration of Buy/Sell or other exit rights
  • Buyout at a discount
  • Loss of ROFO rights by defaulting member
  • Loss of voting rights by defaulting member

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Default Remedies And Removal Rights

  • Programmatic Considerations
  • Does Default impact a single Project vs. entire portfolio?
  • Can/ should remedy be limited to only affected Project?
  • Bad Act as to single Project can damage entire relationship
  • Sponsor will seek to limit loss of Promote to affected Project
  • Buy/Sell or Forced Sale of entire portfolio may be too dramatic for

both parties

  • Consider alignment of interests and unintended consequences
  • Structure of programmatic venture (holding company vs. looser

framework) will impact scope of remedies available

  • Need to reconcile remedies with restrictions under loan

documents and guarantees

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Deadlocks, Lockouts And Exit Provisions

  • Deadlock Events
  • Failure to agree on any Major Decision or a subset?
  • Cooling Down Period
  • Arbitration / Mediation
  • If Deadlock cannot be resolved after period of time, sometimes

triggers exit / liquidity rights

  • Consider motivations/ ability to manufacture a “Deadlock”
  • Exit Strategies and Liquidity Rights
  • Ability to Transfer Venture Interests
  • Single Property or entire Venture/ Portfolio?
  • ROFO/ ROFR to other Members
  • Lock-Out Periods and acceleration rights
  • Direct / Indirect (change in control of Member)
  • Consent rights and other conditions precedent

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SLIDE 20

Deadlocks, Lockouts And Exit Provisions

  • Drag-Alongs / Tag-Alongs
  • Buy / Sell Provisions
  • Whole venture vs. asset-specific
  • Valuation issues (Russian Roulette or Texas Shoot-Out, by

agreement or appraisal formula, alternate marketing right)

  • Sometimes for no reason after lock-out period; sometimes only

after certain level of default or deadlock

  • Put / Call Provisions
  • Valuation through agreement, appraisal formula, auction method
  • Rights and Obligations of Transferees
  • Forced Sale or Marketing Rights for Venture Assets
  • Entire portfolio vs. asset-specific
  • By right after lockout/ stabilization or triggered by default/

deadlock

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