private equity real estate fund formation: capital...

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Presenting a live 90-minute webinar with interactive Q&A

Private Equity Real Estate Fund Formation: Capital

Raising, Regulatory Issues and Negotiating Trends Navigating Capital Contributions, Allocation of Profits/Losses,

Clawbacks, Return of Capital, Fees, Conflicts of Interest, and More

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, MAY 3, 2017

Richard M. Morris, Partner, Herrick, Feinstein, New York

Louis Tuchman, Partner, Herrick, Feinstein, New York

Christopher Dearie, Partner, MJ Hudson, London

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Private Equity Real Estate Fund

Formation: Capital Raising, Regulatory

Issues and Negotiating Trends

May 3, 2017

5

Meet the Presenters

6

Meet the Presenters

Richard (Rick) Morris

Partner

Herrick, Feinstein LLP

Louis Tuchman

Partner


Christopher Dearie

Partner

MJ Hudson

7

Meet Richard (Rick) Morris

• More than 25 Years of Transactional

Experience

• Commercial and Regulatory Issues,

Acquisitions, Financings and Exit Strategies,

Public Company Offerings, Public and

Private REITs

Expertise: Corporate Finance, Corporate Real

Estate, Institutional Investment, M&A, Funds,

Corporate Governance, Executive Employment

and Benefits

[email protected]

Tel 212-592-1432

http://www.herrick.com/


Partner



8

mailto:[email protected]


Meet Christopher Dearie MJ Hudson

[email protected]

Tel +44 20 3693 7037

http://www.mjhudson.com/

Christopher

Dearie

Partner

MJ Hudson

• More than 10 years of Financial Services

Law and Regulatory Experience

• Advises Asset Managers, Banks and

Domestic and International Investment

Funds on Financial Services Regulatory

Issues

Expertise: Financial Services Regulation

9


http://www.mjhudson.com/

Meet Louis Tuchman Herrick, Feinstein LLP

• More than 30 Years of Tax Transactional

Experience

• Tax Implications of Investments, Financings,

Restructurings, Tax Controversies and

Contracts, REITs, REMICs, Tax-free

Exchanges and Transfer Taxes

Expertise: Tax, Private Equity, Private

Investment Funds, Real Estate Joint Ventures

and Restructurings

[email protected]

Tel 212-592-1490


Louis Tuchman

Partner


10



Agenda

Introduction to Real Estate Funds

Considerations of the RE Fund Stakeholders

Key US Tax Issues

Key UK / US Differences and Similarities

Commercial and Capital Raising Issues

Brexit and Updates to EU and UK offerings

Q&A

11


General (and alternative) structures of the private

fund

Difference classes of real estate

Mortgage or Equity

Hybrid Structures

“Blocker Corp” structure

“Portfolio Interest” structure

12


US domestic fund – Simple Structure

US Fund

LP or LLC

US

taxable investors Special

Limited Partner

Sponsors

GP

13


US and Cayman fund with a Corporate Blocker

US Fund

LP or LLC

US

taxable investors Special

Limited Partner

Sponsors

US Fund

LP or LLC

US Blocker Corporation

Non US

and Tax Exempt

and ERISA Investors

GP

14


US REIT

US REIT

US Operating

Partnership

Holders of OPCO Units

Sponsors –

Manager of REIT

Investors (US / Non US tax

exempt and ERISA)

15

Considerations of the different stakeholders in

a Real Estate Fund

Investors

Types: US, taxable, tax exempt, ERISA, Non US

Certain differences regarding tax aspect or profile

ESG sensitive or focused only on returns

Time line: availability of funds and required exit

Sponsors

Active managers, investor relations or contributors of assets

Placement Agents

16

Summary of Certain Material Tax Issues

With respect to each stakeholder

Certain “typical” structures

Blocker Corp as a feeder

Portfolio Interest Exemption

REIT

17

Overview of UK and EU to US Issues

Regulatory aspect or profile

Permanence and Stability of Capital

Time line for investment and returns

Scope of fiduciary issues

Ability to leverage assets and capital commitments

Forum and venue for resolution of disputes

Expectations and typical access to records and influence on valuation and fundamental decisions through the Advisory Board or otherwise

18

Certain Initial Points - Planning Stage

Sponsors

ID of sponsors including investment committee

members

Regulatory aspect of sponsors

Compensation and responsibilities

Terms for "kick out" or termination of a Sponsor

Responsibility of each Sponsor / member

19

Certain Initial Points - Planning Stage (cont’d.)

Raising capital

Type of capital (institutional or retail)

Location of capital (US or non US)

Use of placement agents

Investment Strategy

Certain considerations regarding mortgage, equity,

hybrid

20

Certain Business Issues

Economic terms for the fund

Management Fee

Pref Rate

Sponsor / investor split or "carried interest"

Minimum investment amount

Capital Call and remedies for failure to fund

Escrow of capital commitments or other assurances

21

Certain Business Issues (cont’d.)

Term of the investment period

Term of the Fund

Extension rights

Fees 3rd parties such as leasing agent

Co fee arrangements

Management Agent

Property managers

Asset acquisitions and dispostions

Outside of Scope fees (e.g., testimony)

Leverage restrictions or expectations

Affiliate relationships

Redemption or PE lock up

22

Certain Legal Issues

Securities Laws

Investment Company Act

Exemptions under 3(c)(5)

Investment Adviser Act

SEC registration

Form D

State Filings

Other Registration Exemptions

23

Raising Capital in Europe: a Roadmap for US

Private Equity Real Estate Funds

What is the Alternative Investment Fund Managers

Directive (AIFMD) and how does it affect US managers’

fund raising activities in Europe?

Structuring options for US managers

BREXIT: What are the implications for US Fund

managers?

Key Takeaways

24

What is the AIFMD and how does it affect US

managers’ fund raising activities in Europe?

Scope

Aims to introduce a harmonised regulatory framework across the EEA for managers of non-

UCITS

Applies to:

EEA managers of EEA AIFs (wherever formed or incorporated)

Non-EEA (e.g. US) managers managing one or more EEA AIFs

Non-EEA (e.g. US) managers marketing one or more AIFs to EEA investors (wherever AIF

is formed e.g. Cayman, Delaware)

Precise application depends on location of each of manager and AIF and activities undertaken

Note that Switzerland and the Channel Islands (Jersey, Guernsey) are not in the EEA and are

subject to separate regimes

Limited application to “sub-threshold” managers

25



What is an AIF?

A collective investment undertaking which

Raises capital from a number of investors

With a view to investing it in accordance with a defined investment policy for the benefit of

those investors

Various exemptions:

Holding companies

Group arrangements

Operating companies (e.g. typical US REITs)

Managed accounts (funds of one), joint ventures, family offices (intended to be exempt but

concepts not defined)

Precise application depends on location of each of manager and AIF and activities

undertaken

26



Marketing

An “offering or placement of units or shares at the initiative of the AIFM or

on behalf of the AIFM”

Reverse solicitation: investment at investor’s initiative not prohibited – but

proceed with caution

Pre-marketing: permitted in many member states subject to pre-existing

promotion rules (if any) – again, proceed with caution

27



Passporting

Aim: to permit cross-border management and marketing across EEA in accordance

with harmonised rules (as opposed to individual member states’ own rules)

Aim has been frustrated somewhat by disparate approaches of certain member

states in implementing passporting regime

Currently only available to EEA managers of EEA funds (not available to EEA

managers of non-EU AIFs or to non-EEA managers of any AIF (“Non-Passporters”)

European regulators have consulted on extending the passport to “third countries”

on the basis of individual “equivalence” decisions – US initially excluded

Decisions likely to be delayed until post-Brexit and, potentially, the enactment of

AIFMD II

28



National private placement (“NPPR”)

For the time being, AIFMD permits individual member states discretion to allow the

active marketing of AIFs by Non-Passporters subject to:

certain generally applicable criteria (“Baseline Requirements”)

notification of intention to market

compliance with local marketing rules Certain jurisdictions insist only on compliance

with these rules (UK, Luxembourg, Netherlands)

Others allow private placement subject to an amount of “gold-plating” (Baseline

Requirements + additional local rules) e.g. Germany and Denmark require

appointment of a depositary

Others have prohibited private placement outright

Local advice should be sought before marketing

NB: NPPR may be “switched off” in the future – all managers marketing in Europe

may need to subject themselves to European authorisation requirements

29

AIFMD: structuring options for US managers

Investigate applicability of exemptions

NPPR

EEA subsidiary

Engage a “Host” AIFM

Rely on reverse solicitation

30

BREXIT: implications for US managers

Article 50 of the Treaty of Lisbon triggered on 29 March 2017

Effect: Britain should leave the EU not later than April 2019 – though this is a unique

situation…may take (much) longer

Something of a moveable feast. Some thoughts:

May affect managers using UK subsidiary or UK fund vehicle

May also affect managers proposing to market another European (e.g. Irish or Luxembourg

vehicle) in to UK

Will UK remain in single market? Depends on election result. Why does it matter? Access to

passport

If outside single market, effect will depend on the nature of the deal UK cuts with EU re access

UK will become a “third country” and subject to equivalence determination

If contemplating a European structure, consider Brexit hedge

31

Key Takeaways

US managers should carefully investigate and periodically review the available options for raising funds in the EU. Changing environment

Where is my target investor base in Europe?

Will I be raising funds across multiple jurisdictions or just a select few?

What resources do I have at my disposal?

What is my proposed timetable? Do I have any deadlines?

Is reverse solicitation a viable option?

Do I want to rely on the national private placement regimes? Have I checked the private placement requirements in each target jurisdiction and whether or not the offer or marketing needs to be registered prior to the fundraise?

Do I want to establish a permanent presence in Europe and set up an EU manager and EU fund/ use a 3rd party EU Platform for full EU compliance and be subject to the AIFMD regime?

32

Investment Strategy and Operations

Class of real estate

Leverage

Joint ventures or co-investments

Development issues

Differences of RE Fund and other “typical” Private

Funds

33

Entity Structure

LP or LLC

Would you ever use a corporation that is NOT a

REIT?

Answer is generally tax-driven

Yes in non-U.S. jurisdictions; and

Yes as a “blocker corp”

34

Certain Tax Points

Federal Tax issues

Will you have U.S. “trade or business” income or

passive, investment income?

FIRPTA rules change the landscape for real estate

Structures that are used

Pass-throughs

Blocker corporations

35

Certain Tax Points

Federal Tax issues – loan funds

Portfolio Interest Exemption

When are you a lender, when are you an investor

“Season and sell” approach

36


Partner


Louis Tuchman

Partner


Christopher Dearie

Partner

MJ Hudson

[email protected]

+1 212-592-1432

[email protected]

+44 20 3693 7037 [email protected]

+1 212-592-1490

37




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