LSI 2010 Real Estate Joint Ventures conference materials.pdf

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Donald E. Percival of Davis Wright Tremaine LLP Speaker 27: 6 BASIC EXIT STRATEGIES – REAL ESTATE JOINT VENTURES Price to receiving partner based on value of entity interest or value of underlying assets owned by entity? Pricing established by initiating partner or by binding third-party offer? Receiving partner obligated to either buy or sell? Following exercise of option, receiving partner buys . . . Following failure of receiving partner to exercise, third party buys . . . Dissolution and Liquidation of Venture Underlying assets Third-party sale Right of First Offer (ROFO) Entity interest Initiating partner Right of First Refusal (for Venture Interests) (ROFR) Entity interest Third party offer Forced Property Sale Underlying assets Thirdparty offer Buy-Sell Underlying assets Initiating partner N/A No No Yes Yes N/A N/A Entity interest Entity interest Entity interest Entity interest Entity interest Underlying assets Entity interest N/A B. Variations on Basic Venture Exit Strategies 1. Other structures and triggering mechanisms (a) Right of first negotiation (cooling off period) (b) Mandatory buyout upon occurrence of certain events (death, disability, termination of employment, etc.) (c) Optional buyout (“call”) upon occurrence of certain events (death, termination of employment for cause, etc.) (d) Optional buyout (“call”) of a partner’s interest following default by that partner (typically, developer partner) (i) Definition of default: Often distinguish between breach of obligations (e.g., failure to make contributions, taking actions without obtaining required investor consent, gross negligence) and mere poor performance (e.g., failure to pay - 5 - Law Seminars International | Real Estate Joint Ventures and Funds | 02/09/10 in Seattle, WA
Donald E. Percival of Davis Wright Tremaine LLP Speaker 27: 7 (ii) guaranteed preferred return or to meet other performance criteria) Remedies/pricing: Removal of defaulting GP/manager Optional buyout (with or without setoff for actual damages?) Forfeiture of right to receive (all or some portion of) promoter’s interest (e) Optional or mandatory “put” upon occurrence of other events (e.g., death, disability, termination of employment) 2. Other pricing methods (a) Distributions (of portfolio interests) in kind (b) Re-trading room (c) (i) (ii) Even if valuation is based on price stated in initiating partner’s notice (ROFO) or third-party offer (ROFR or forced sale), if receiving partner declines to buy, initiating partner may be given re-trading room to sell its interest (or the underlying assets) to a third party for price that is within some modest percentage (say, 2% - 5%) of original price stated in activating notice Similarly, in case of ROFR or forced sale, receiving partner may be given right to elect to purchase initiating partner’s interest at a modest discount (say, 2%-5%) from price stated in third-party offer, on theory that purchaser is likely to re-trade. Valuation based on appraisal (i) Appraisal of what? (ii) Partner’s interest or underlying property? Working capital adjustment? Dispute resolution using multiple appraisals Average of two? Average only if difference is less than x% of [lower/higher] value? If two don’t agree, use third appraisal? Use third only if between the other two (otherwise use middle appraisal)? “Baseball” arbitration (i.e., third party picks between two appraisals)? - 6 - Law Seminars International | Real Estate Joint Ventures and Funds | 02/09/10 in Seattle, WA
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L A W S E M I N A R S I N T E R N A
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Monday, February 08, 2010 Real Esta
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John W. Hanley, Jr., Ste
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Table of Contents Topic Speaker # L
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Faculty for Real Estate Joint Ventu
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John W. Hanley, Jr. of Davis Wright
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Steven L. Wood of Century Pacific,
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Tracy B. Edgers of Wells Fargo Bank
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Steven L. Wood of Century Pacific,
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Quentin Kuhrau of Unico Properties
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