LSI 2010 Real Estate Joint Ventures conference materials.pdf

John W. Hanley, Jr. of Davis Wright Tremaine LLP Speaker 20a: 9
(d) Construction and Development Management Fees. Sometimes a proposed fund
will target development opportunities, and the fund sponsor may propose that an affiliate provide
construction management or real estate development services, usually pursuant to a separate
agreement, in exchange for the fee stated therein (perhaps a percentage of the construction or
development phase budget).
(e) Sponsor Overhead Fees. Occasionally a private equity fund will allow the
sponsor to recoup a small portion of its general administration and overhead by means of an
additional services fee, such as an annual accounting/reporting fee.
(f) Placement Fees. Finally, a fund sponsor may be able to persuade a prospective
investor that the placement fee typically paid by the investor to its own family wealth office,
advisor or other representative should be split, with a portion of that fee going to the fund
sponsor, in consideration of the fund manager’s willingness to present this fund investment
opportunity.
3. Structure and Governance of Fund.
Basic Structure and Documentation. A fund is a separate legal entity, typically formed as
a limited liability company or a limited partnership. Delaware is frequently chosen as the
jurisdiction of formation, although, in an earlier era, Maryland was a favored jurisdiction for the
formation of limited partnerships.
The sponsor of the fund may choose to serve as the manager (in the case of an LLC) or
general partner (in the case of an LP) of the fund entity, or the sponsor may have an existing
affiliated management company ready to serve that function, or the sponsor may form a new
special purpose entity to play that role only for a particular fund. Investors will participate in the
fund either as members (of the LLC) or limited partners (of the LP). Regardless of the form of
entity, the entity formation laws of the organization’s jurisdiction will typically permit the
entity’s founder to create multiple classes of ownership interests, so the capital structure of a
fund may be as complex as the aspirations and imagination of the founder allows.
In the balance of this paper, to simplify the discussion, we will assume that the typical
real estate fund is a limited liability company, and all investors in it are members of a single
class. The fund will be governed by a limited liability company agreement (sometimes called an
“operating agreement”), a contract to which the fund manager and all members are parties. The
fund will also be governed by the formation law of the state of organization, which may impose
absolute requirements concerning governance or operation of the fund, or “default rules” that
will be applicable in the absence of contrary rules specifically stated in the limited liability
company agreement. One reason Delaware is a favorite jurisdiction, among lawyers, for
formation of real estate funds (and joint ventures) is that state’s expressed policy (stated in its
statute) to maximize freedom of contract. The Delaware Limited Liability Company Act
imposes very few absolute rules of operation on the limited liability company formed in that
jurisdiction; it creates most no default rules that will govern if the framers of the fund’s operating
agreement forget to set a different rule in the document; and it expressly authorizes the founders
of the limited liability company to use the operating agreement to modify – or eliminate –certain
common law rules of conduct that Delaware courts would otherwise impose on the fund or its
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Law Seminars International | Real Estate Joint Ventures and Funds | 02/09/10 in Seattle, WA
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