LSI 2010 Real Estate Joint Ventures conference materials.pdf
LSI 2010 Real Estate Joint Ventures conference materials.pdf
LSI 2010 Real Estate Joint Ventures conference materials.pdf
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David E. Myre, Jr. of Hillis Clark Martin & Peterson, P.S.<br />
Jane Rakay Nelson of Lane Powell PC<br />
(3) Otherwise, additional capital calls during Construction Phase only by<br />
mutual agreement.<br />
Developer: Nervous about giving this power to Construction Lender. Can accept<br />
only if some stated cap in JV agreement on maximum aggregate additional<br />
capital contributions.<br />
Investor: Depends on size of cap in relation to Project budget.<br />
Developer: What consequences if Member just cannot meet call? What does<br />
Term Sheet mean by “customary operating agreement provisions”?<br />
Investor: Quite simple. Other Member (“Performing Member”) can choose to<br />
advance the missing capital to the JV. And if it does, it can do so in either of<br />
two ways:<br />
First, Performing Member can make another capital contribution directly to JV,<br />
in exchange for preferred return. Second, alternatively, Performing Member<br />
can advance “missing funds” to JV and treat that as a loan by the Performing<br />
Member to the Defaulting Member, and a capital contribution by the Defaulting<br />
Member to the JV. Naturally, this loan by one Member to the other Member<br />
will bear interest and have other commercially reasonable loan terms.<br />
Developer: Doesn’t sound simple to me. Why can’t the Performing Member just<br />
loan the missing capital directly to the JV? Earn a reasonable rate of interest<br />
and get repaid before equity distributions?<br />
Investor: Couple of reasons. Simplest is that Construction Lender will not permit<br />
subordinate debt financing for Project but will permit additional equity<br />
contributions to the Company’s capital base.<br />
Developer: Okay. Tell me more about the first funding alternative you proposed.<br />
Investor: Performing Member makes voluntary additional capital contribution in<br />
amount of missing funds. After that, capital will no longer be 90-10. As<br />
reward for covering this unexpected equity gap, this voluntary capital<br />
contribution should command priority return. That is, whenever JV begins<br />
accumulating cash, JV distributions to Members will go first to return this<br />
capital plus an annual return of, say, 8%.<br />
Speaker 9b: 3<br />
Speaker 10b: 3<br />
DWT 12265643v1 0000099-071219<br />
3<br />
Law Seminars International | <strong>Real</strong> <strong>Estate</strong> <strong>Joint</strong> <strong>Ventures</strong> and Funds | 02/08/10 in Seattle, WA
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