Presenting a live 90-minute webinar with interactive Q&A Structuring Real Estate JVs: Capital Contributions, Distributions, Allocations, Taxes, Governance, Exit Strategies Negotiating Joint Venture Deals in Property Development to Minimize Financial and Legal Risks THURSDAY, OCTOBER 1, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Richard R. Spore, III, Partner, Bass Berry & Sims , Memphis, Tenn. Allen B. Walburn, Partner, Allen Matkins , San Diego 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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STRUCTURING REAL ESTATE JOINT VENTURES Richard Spore Bass, Berry & Sims PLC 100 Peabody Place, Suite 900 Memphis, TN 38103 (901) 543-5902 rspore@bassberry.com
The Economics of Real Estate Joint Ventures: Introduction, Capital Contributions, Capital Calls, and Distributions Preliminary Issues In Carving Up The Pie The more an owner has at stake financially, the greater the returns he/she will expect. The greater the owner's risk, the greater the returns he/she will expect. The greater an owner's contractually guaranteed returns, the smaller an "at risk" profits return he/she should expect. 6
The Economics of Real Estate Joint Ventures Guaranteed Payments And Fees Examples: management and leasing fees and commissions; asset management fees, construction management/owner's representative fees; and development fees Transparency, disclosure, and avoiding real and perceived conflicts of interest Establishing market fees 7
The Economics of Real Estate Joint Ventures Capital Call And Guaranty Obligations Do owners want to address the potential need to "feed" the project at the outset, in the JV agreement, or in the future when/if a problem arises? Pros and cons of each approach. Specific drafting considerations: required approvals to issue capital calls; limitations on amount(s)/frequency of capital call(s)/required form of capital calls (e.g., cash vs. credit enhancement guaranties of 3rd party debt); mandatory vs. voluntary participation; allocation of responsibility among owners for meeting capital calls; consequences of failure to meet capital calls. To what extent are owners obligated to provide personal guaranties of JV obligations? Will owners receive separate compensation for providing guaranties and, if so, how is that compensation determined (e.g., a percentage of the guaranteed amount)? Or is the guaranteeing owner's guaranty compensation already "baked into" the overall distribution "waterfall" for the JV? 8
The Economics of Real Estate Joint Ventures Return of Capital, Preferred Returns and Promote Interests Cash distribution waterfall generally: guaranteed payments; return of capital; preferred returns; and profits/promote interest distributions Establishing and documenting an owner's book capital: cash capital contributions vs. in-kind capital contributions (e.g., contributions of real property or services) Avoiding capital shifts to services partners using profits/promote interests 9
The Economics of Real Estate Joint Ventures Return of capital and preferred returns to capital providers: Any preference in priority of return of capital distributions? Are all capital contributions created equal? Do return of capital priority distributions apply to subsequent capital contributions (e.g., following a future capital call)? How are any preferred returns determined? Simple interest on outstanding capital or a more complicated IRR threshold? Are preferred returns cumulative and compounding? Are they applicable to initial and all future capital contributions? Promote Interests: Typically will vary by property type and size; identity/nature of the capital providers; experience/track record of the promoter; amount of guaranteed fees to promoter; the promoter's overall risk (e.g., has a creditworthy promoter provided a loan/construction guaranty?); the risk inherent in the project (e.g., purchase of stabilized property with anchor tenant for market cap rate vs. development or turn-around/distressed project). What is the promoter's value-add and risk/exposure? Can range from single digits to 40-50% (or more). 10
Management and Governance of Real Estate Joint Ventures Granting and limiting management authority: Clear delegations of authority for day to day management Clear limitations of authority for fundamental actions/decisions (e.g,. incurring secured debt or unsecured debt in excess of threshold amount/outside ordinary course of business; sale of property or leases in excess of threshold/outside ordinary course of business; not distributing all available cash flow; terminating/engaging/changing managers/leasing agents/franchisors; capital expenditures or constructing improvements in excess of threshold/outside ordinary course of business; deviating from minimum required insurance standards; mergers, conversions, share exchanges or other entity reorganizations; deviating from approved budget by more than pre-approved tolerances; entering into any agreements with any owner/owner affiliates; acquiring additional property; etc.) Clear accountability for authority exercised and responsibility for third party outside management services providers 11
Management and Governance of Real Estate Joint Ventures Avoiding unpleasant surprises through pre-approved budgets Tolerated deviations from pre-approved budgets Transparency and disclosure/approval of conflict transactions: State law requirements: full written disclosure and approval by disinterested parties vs. "fair to the entity" Contractual requirements/limitations 12
Management and Governance of Real Estate Joint Ventures Replacing nonperforming managers: Termination with cause and consequences: Definition of "cause" Required approvals to terminate for cause Forfeiture of promote interest Buy-Sell provisions Termination without cause and consequences: Required approvals to terminate without cause Termination fees/liquidated damages Buy-Sell provisions 13
Exit Strategies Using buy-sell provisions to avoid conflict: "Russian roulette" buy-sell provisions Put/call buy-sell provisions Implications of buy-sell provisions under loan covenants 14
Exit Strategies Using alternate dispute resolution to resolve conflicts in real estate JVs: Mediation vs. arbitration "Baseball" arbitration 15
Structuring Real Estate JVs: Capital Contributions, Distributions, Allocations, Taxes, Governance, Exit Strategies Allen B. Walburn Allen Matkins Leck Gamble Mallory & Natsis LLP 619.235.1547 awalburn@allenmatkins.com October 1, 2015
17 Agenda I. Taxation of Partnership (In General) II. Cash Capital Contributions III. In-Kind Capital Contributions IV. Liabilities V. Disguised sales VI. Additional capital contributions and dilution provisions VII.Allocations of Profits and Losses
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