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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

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 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 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

18

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 19

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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