LSI 2010 Real Estate Joint Ventures conference materials.pdf

David E. Myre, Jr. of Hillis Clark Martin & Peterson, P.S.
Jane Rakay Nelson of Lane Powell PC
Investor: You’re referring to the “removal” and “Default” provisions in paragraph
9 of the Term Sheet. Keep in mind that Developer is in an absolutely critical
position. Your company is Manager and exercising day-to-day control over
completion of the Project. Our investment fund is relying on your company.
We will have placed great trust in you.
If Developer fails to make a proportionate additional capital contribution when
required to save the Project, that will tell us that our trust was misplaced. And,
if our fund steps up and saves the Project by providing the missing capital, to
cover the capital deficit, your company will no longer has a meaningful
economic interest in the Project. Developer will lose interest and begin to take
its eye off the ball. We need to be in a position to act---to seize control of the
Company and the Project.
Developer: That’s ridiculous. First, Developer will have invested at least $3.5
million – our initial capital contribution – in this Project. We will have that at
risk. Plus the substantial development fee that we think the JV should pay
Developer at Project Stabilization. Plus the leasing commissions and property
management fees that our affiliated asset management company can earn at the
Project in the future. Not to mention our reputation in this community, which is
our home, not yours. In fact, I think that Developer will have more at risk
during the Construction Phase than Investor will – even if Developer happens to
miss an additional capital call notice.
Second, you are joint venturing with us because of our real estate development
and construction management expertise – not because we are an inexhaustible
source of equity capital. Providing capital is basically your job – not ours.
We understand that there will be stated grounds in the Operating Agreement for
removal and replacement of Developer as Manager of the JV, but these should
be grounds tied to performance of our special skills and functions – real estate
development and construction management. If Developer is fully performing as
Manager, it is irrelevant that Developer as a small minority owner of the JV was
unable to meet an unexpected additional capital call.
These additional punitive measures in the Term Sheet concerning removal of
Developer as Manager and exercise of Default remedies are unfair—and they
are probably not enforceable anyway. They are a penalty provision, a
forfeiture. They must be deleted!
Speaker 9b: 5
Speaker 10b: 5
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Law Seminars International | Real Estate Joint Ventures and Funds | 02/08/10 in Seattle, WA