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Real estate Joint Ventures for Commercial Real estate
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Real Estate Joint Ventures for Commercial Real Estate Development. continued access to the dollar equity partner s capital Understanding the lens through which each type of partner. views the project will help inform the negotiating and drafting of the joint venture agreement and your client s. priorities related to the terms of the joint venture agreement. Prepare a Term Sheet, While many real estate partners prefer to strike an agreement on a joint venture deal with a handshake the. recommended course of action is to first prepare a term sheet outlining the primary joint venture deal terms. Whether the term sheet is binding entirely or partially or not at all is up to the parties The important point is to. identify potential sticking points early on in the process to avoid losing time and money later on if the parties are. unable to reach an agreement on the primary points At a minimum the term sheet should include the following. Identity of the project under consideration and the timing expectations for the acquisition development. Relative ownership interests of the various partners. Capital contributions timing consequences of failure to contribute and return of capital. Management and control, Contemplated transactions with affiliate parties e g development leasing management agreements. Third party lending considerations e g how to choose a lender identity of guarantor s compensation of. guarantor s, Dispute resolution and or terms of any parties exit from the venture and. Any other unique aspects of the deal, For more on documenting the terms of a proposed joint venture see Letters of Intent in Joint Ventures For a. sample form see Real Estate Joint Venture Term Sheet. Determine Joint Venture Entity Structure and Jurisdiction. When the parties are confident they have a deal the parties should begin the process of creating the joint venture. entity and preparing the joint venture agreement Although there is no legal requirement to do so best practice. is to create a separate legal entity for the joint venture to reduce complications allow greater ease in pooling. resources and help isolate potential liabilities relating to the project. When creating a new legal entity for the joint venture the potential partners must first determine what type of. entity to create Limited liability companies are the most common entity type used for real estate joint ventures. due to their ease of formation flexibility in determining management structure and limited liability for all members. However there is no one optimal entity type for all real estate joint ventures Depending on the location of. the project and the parties intended relationship there may be tax consequences that necessitate use of a. corporation general partnership limited partnership or other type of business entity You should discuss the. anticipated joint venture and possible real estate joint venture entity types with a tax attorney and or qualified CPA. prior to forming the business entity to ensure you select the best entity type for the particular circumstances For. more on types of entities see Joint Venture Formation Basic Forms of Joint Ventures. Once the type of entity is chosen the next step is determining where the entity will be created Rather than simply. choosing the state where one or more of the partners are located the parties should consider the location of the. real estate project see Joint Venture Entity Creation and Documentation regarding foreign registration and any. requirements that a lender may have For example it is customary in retail real estate for permanent loan lenders. to require a borrower or its managing member to be organized in the State of Delaware As a result it may be. Real Estate Joint Ventures for Commercial Real Estate Development. easier and more cost effective to initially organize in that state rather than having to effectuate a property transfer. conversion or merger prior to entering into a loan agreement For a discussion on choosing a jurisdiction in which. to organize a joint venture structured as a limited liability company see Limited Liability Company Jurisdiction. of Formation For a survey of state laws governing limited liability company formation and links to formation. documents see Limited Liability Company Formation State Laws Survey For guidance in organizing a joint. venture organized as a limited liability company in Delaware see Limited Liability Company Formation DE. Joint Venture Entity Creation and Documentation, Once the parties agree on the location and type of entity the joint venture entity is ready to be created The first.
step is to file the applicable organization document with the chosen state s Secretary of State e g Articles of. Organization or Certificate of Formation for a limited liability company Articles of Incorporation for a corporation. If the state of organization of the joint venture is different than the state s in which it will conduct business the. joint venture must qualify as a foreign entity in order to conduct business in such other states State requirements. for information and forms for such registration vary but the typical filing is referred to as a foreign registration or. qualification, Following organization the new joint venture entity should also complete and file a Form SS 4 with the Internal. Revenue Service IRS in order to obtain a federal employer identification number that can be used to open bank. accounts file and pay taxes and obtain a loan One of the few exceptions to this rule is when the joint venture. entity will be wholly owned by a single entity that has its own federal employer identification number In that. event assuming the joint venture entity elects to remain being treated as a disregarded entity for tax purposes. the federal employer identification number of the sole member of the joint venture entity may be used instead of. obtaining a separate federal employer identification number for the joint venture entity. Finally the parties must prepare the main governing document to administer the joint venture the joint venture. agreement itself The joint venture agreement is typically the primary governing document for the applicable joint. venture entity such as an operating agreement for a limited liability company or a partnership agreement for a. general or limited partnership, If as is often the case the partners that are coming together to form the joint venture intend to effectuate multiple. projects together using a similar structure it is a good idea to draft a base form joint venture agreement that can. easily be conformed for each specific deal By creating a base form you will ease some of the administrative. burden of drafting joint venture agreements for future deals between these same partners because each deal. specific joint venture agreement can be marked against the form to highlight any deal specific changes This is. user friendly to both attorney and client and will help reduce legal expenses for future transactions. In the event a joint venture involves three or more parties simultaneously with the preparation of the joint venture. agreement or at any time during the joint venture s existence two or more parties can enter into separate. agreements and terms typically through documents referred to as member agreements stockholder agreements. or partner agreements based on the joint venture entity type These kinds of agreements are particularly useful. for terms governing the relationship among only certain partners e g buy sell terms for different membership. classes obligations between two or more sweat equity partners etc or for terms that are likely to change. frequently as this type of agreement may be easier to amend than the formal joint venture agreement. Real Estate Joint Ventures for Commercial Real Estate Development. Key Provisions in the Joint Venture Agreement, Seemingly innocuous the statement of the joint venture purpose is a key provision in joint venture agreements. and is typically required to be included under various states laws While a typical single member operating. agreement may contain a purpose statement that allows the company to engage in any lawful business and. activity permitted under existing law the joint venture members will want assurances that the joint venture will not. pursue activities beyond that contemplated by the parties At the same time the joint venture will also practically. need its purpose language to be broad enough to cover the myriad of activities required to develop real property. Set out below is a sample purpose provision for a joint venture agreement that is broad but also limits activities to. those pertaining to specific real property, The Company is organized for the purpose of i acquiring purchasing selling exchanging constructing. developing operating leasing assigning transferring financing encumbering and otherwise dealing in. or with the real property including the land that is the subject of the proposed development personal. property equipment supplies and other items in relation to the purposes stated herein and ii doing any. and all things permitted by law incidental to the foregoing including but not limited to borrowing of funds. pledging of Company assets and dealing with tangible and intangible property of all kinds. When drafting a joint venture agreement for a development project the provisions dealing with the budget are. of particular importance The sweat equity partner must ensure that the budget provides for all of the expected. and some unexpected costs that may arise during the development process The money or equity partner will. likely seek to limit any requirements for funding in excess of the budget agreed to at the time the joint venture. agreement is entered into Both parties must ensure that the budget is both realistic and flexible enough to ensure. the timely completion of the project The real estate budget development process can be broken down into three. parts for this discussion 1 predevelopment budget 2 pro forma construction budget and 3 development. The predevelopment budget sets forth the proposed capital outlay for land acquisition costs These costs will vary. by project and the line items will generally include feasibility studies and entitlements engineering architectural. legal and costs incidental to contracting for the acquisition of land e g tax payments earnest money deposits. etc The parties should add a Miscellaneous line item to account for the unknown but inevitable costs that. will arise at this predevelopment stage By establishing the predevelopment budget you ensure that the party. incurring the expense if not the joint venture entity will be reimbursed by the joint venture for its property pursuit. and planning costs, The pro forma development budget is a preliminary budget that will provide the joint venture partners with a.
detailed outline of projected total costs and perhaps more importantly equity requirements Because the joint. venture partners generally must inject equity prior to using loan funds the pro forma development budget allows. the joint venture partners to plan for the upcoming equity requirements In addition the pro forma development. budget creates the foundation for the development budget that is ultimately submitted to the lender and used for. construction, It is unlikely a development budget will be available at the time of signing the joint venture agreement but if it is. there is no need to prepare the pro forma budget If it s not available you must create a procedure for the parties. to convert the pro forma budget into the development budget This procedure can be simple or complex and is. wholly dependent upon the negotiating strength of the parties and the predetermined division of labor among the. Real Estate Joint Ventures for Commercial Real Estate Development. parties One option is for the development budget to be approved so long as the figures are consistent with those. outlined in the pro forma budget and any deviations require the consent of a manager the majority member a. certain percentage of the members or any other approval method that suits the parties. In considering whether the total budget number is consistent with the pro forma budget you may also want to. consider deviations within certain budget categories For example if costs of one budget category increase the. party managing the budget process may keep things on budget by reallocating funds from a different budget. The joint venture parties may wish to limit budget reallocations This is commonly done by inserting a provision. similar to the below in the joint venture agreement. Party controlling the budget the Control Party shall not reallocate line items within the Budget from. how such items were presented in the pro forma budget unless i the Control Party obtains consenting. party s prior written consent to any reallocation which exceeds on a per occurrence basis. and ii Control Party can demonstrate to consenting party s satisfaction that a such reallocation. constitutes final cost savings in said line item such that sufficient funds remain in the line item from which. the amount is to be reallocated to pay all Project Costs which may be paid from that line item and b. no line items in the Budget other than the line item to which the reallocation is sought are required in. consenting party s judgment to be increased, Additionally you should consider whether there are any items that will not be subject to reallocation suc. Real estate Joint Ventures for Commercial Real estate Deelopment 1 J Andrew Crossett Samantha Maerz This practice note discusses the reasons parties enter into real estate joint ventures for the development of commercial real property how to form a real estate joint venture the importance of a robust joint venture agreement key terms of which to be aware and drafting tips related to such

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