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
Speaker 9b: 6
Speaker 10b: 6
Investor: I seem to have touched a nerve. Well, as to the enforceability, these
terms are quite typical and are specifically authorized by Delaware law. It’s a
little unusual, but you may have noticed that I attached a copy of the pertinent
section of the Delaware statute---section 18-502(c)---to the Term Sheet as an
exhibit. Take a look.
Tell you what. Let’s postpone further discussion of this last topic until we
come back to the “removal” and “Default” provisions later in the Term Sheet.
Investor is concerned about the scenarios of the Project running into serious
trouble, Developer deciding to “give up” on the Project, and intentionally
refusing to honor a series of additional capital calls. And Investor not being
able to dislodge Developer and take control of the mess. But let’s try to address
that concern when we get to the subject of Manager removal and Member
default.
Developer: Okay. One last question. I gather from the Term Sheet that Investor
proposes a different, much simpler approach to the subject of additional capital
contributions after the JV achieves Project Stabilization. Why is that?
Investor: Three reasons. First, once it hits Project Stabilization, the JV has passed
through a phase of relatively high risk and into a period of much lower risk.
Almost all of the development, construction and lease-up risks will be behind
us. The most likely scenario leading to an equity capital shortfall after Project
Stabilization would probably be an uninsured casualty, or a design or
construction defect not covered by the warranties, or a major lease rollover
requiring substantial, unanticipated tenant improvements. So, generally
speaking, Investor feels there will be much less likelihood of needing to make
unforeseen additional capital contributions after Project Stabilization.
Second, soon after Project Stabilization the JV will refinance the Construction
Loan with the Term Loan described in the Term Sheet. Investor anticipates
that, unlike the Construction Loan, the Term Loan will permit subordinate
financing for the Project, at least if it is an unsecured loan to the Company. So
we will be able to use a simpler structure to deal with the scenario if a Member
decides not to make an additional capital contribution – namely, a direct loan by
the other Member to the JV.
Third, as mentioned in the Term Sheet, the JV agreement will provide that, after
Project Stabilization, the Members will go through an annual process of
mutually approving an annual budget and annual business plan for the
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Law Seminars International | Real Estate Joint Ventures and Funds | 02/08/10 in Seattle, WA