LSI 2010 Real Estate Joint Ventures conference materials.pdf

John W. Hanley, Jr. of Davis Wright Tremaine LLP Speaker 20a: 12
Investment Discretion Limitations. One of the manager’s greatest responsibilities, and
most important authorities, is selection of the real estate assets into which to invest the “blind
pool” fund’s capital. Frequently, the fund charter will grant broad investment authority to the
manager but subject that authority to several different investment power limitations, sometimes
called “investment objectives” or “investment guidelines.” These limitations should be driven
by (and consistent with!) the investment plan described to the prospective investors in the fund’s
offering materials. Among the types of limitations frequently found in real estate fund charter
documents are the following:
(a)
geographic limitations;
(b) limitations by product type (e.g., office properties, multifamily properties,
industrial properties);
(c) descriptive prohibitions (e.g., no hotels, no property requiring new construction,
no environmentally-impaired property);
(d) concentration limitations, which limit the amount (usually by percentage) that the
fund’s capital that may be invested in a single asset, thereby promoting diversity; and
(e) minimum and maximum amounts of leverage that may be drawn down to support
any asset acquisition.
As a failsafe to protect the ability of the fund to respond to changing market conditions,
the fund sponsor may also include, in the fund charter, a provision authorizing an investment
advisory committee to approve transactions outside of the stated investment guidelines.
The Advisory Committee. Frequently, a real estate fund will create an advisory
committee composed of a specified number of representatives designated by investors selected
by the fund sponsor (normally those investors with the largest capital commitments to the
enterprise). Sometimes the committee will be composed of representatives selected by all
investors in the fund, using a weighted voting process. This advisory committee will be given its
own “charter,” inside the limited liability company agreement, and that charter may give the
committee any or all of the following responsibilities:
(a)
(b)
authorize divergences from the investment limitations;
approve or disapprove transactions in which the manager has a conflict of interest;
(c) authorize or require early termination or extension of investment period in light of
unexpected market conditions;
(d)
(e)
(f)
approve the fund’s auditor;
approve the fund’s appraiser (if one is needed); and
initiate or approve an early termination of fund, or extension of fund’s term.
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Law Seminars International | Real Estate Joint Ventures and Funds | 02/09/10 in Seattle, WA