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Real Estate Joint Ventures: Crafting an Enduring Partnership

Nicole Mesard, Debevoise & Plimpton LLP

Jay Neveloff, Kramer Levin Naftalis & Frankel LLP

December 12, 2016

Formation and Structure

Type of entity Typically LLCs or LPs

Delaware LLC is preferred type of entity

» Familiarity

» Allows modification or elimination of fiduciary duties of manager

Property owner is typically a single purpose entity (SPE) required by lender so that it is bankruptcy remote (also serves as an additional liability shield/separation)

Property Owner SPE (typically an LLC) will be owned (directly or indirectly) by JV

Promote: Negotiated deal-by-deal

Separate management, construction and/or development agreement

Liability

Limited Partnerships (LPs) limited liability for limited partners, only GP is exposed

Limited Liability Companies (LLCs) all members have limited liability

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Consequences of Manager

Removal considerations

Project completion issues if Developer/Managing Member is no longer directing construction

Finding a replacement manager (terms including promote)

Lender concerns

»

»that matches the JV removal rights

» Mstep into the shoes of the removed manager partner

Completion Guaranty issues/replacement?

» When removed, Managing Member wants as a condition to such removal their release from all guaranties

» Investors usually offer a replacement guarantor or a back-stop indemnity if Managing Member cannot be released

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Exclusivity and Non-Compete Provisions

Exclusivity/Non-Competes

Investor Member will want Developer/Managing Member to agree to commit to the property/project and not develop competing projects, poach tenants, spread itself too thin

Typically structured with an agreed upon radius (distance will depend on geographic location) and project type

Sometimes Developer/Managing Member agrees to provide Investor Member with right of first offer/right of first refusal for certain other development transactions

http://www.nysba.org/WorkArea/DownloadAsset.aspx?id=69199

and a sophisticated investor (1) rarely, if ever, involve rights of first refusal;and (2) typically characterize the sponsor as an administrative member ratherthan a managing member because the investor wants a significant level ofcontrol that may be inconsistent with the notion of someone else managingthe venture (other than day-to-day activities).

JV Mock Negotiation Note:

In our experience, JV transactions between a sophisticated sponsor