How Attractive is This Option?

Winter Forum on Real Estate Opportunity and Private Fund InvestingJanuary 27, 2005

The Montage • Laguna Beach, California

Setting Up Joint Ventures:

Panelists

James ChiboucasGeneral CounselKBS Realty Advisors, LLC

Steven C. KoppelPartnerHeller Ehrman

Sanford PresantNational Director of Opportunity FundsErnst & Young LLP

L. Bruce FischerPartnerMorgan, Lewis & Bockius LLP

Fred PillonPartnerGibson, Dunn & Crutcher LLP

Michael SchwartzBrokerGeorge Smith Partners, Inc.

Why Joint Venture The Deal? Is It Worth It?

Advantages to the Joint Venture Structure vs. Going It Alone Increases the pool of investments available to

investors Allows investors to leverage their investments by

investing in more properties May provide operational and construction expertise

to the investor Provides property owners and/or operators with

additional project equity without incurring additional debt

Why Joint Venture The Deal? Is It Worth It?

Disadvantages to Joint Venture Structure vs. Going it Alone It is often times difficult to negotiate joint venture

documents from both a time and cost perspective There is almost always a greater loss of control by

all parties then expected The operator is often times required to give a

greater portion of the economic upside then desired The investor is often times required to assume

responsibility for a greater portion of the economic downside then desired

Why Joint Venture The Deal? Is It Worth It?

Alternatives to the Joint Venture Structure Other Than Going It Alone Origination of a mezzanine loan by the investor

with the returns to which the investor is entitled mirroring what the investor would have received as a joint venture partner (may be easier and less costly to document then joint venture documents)

For development transactions, the entering into of a development management agreement by the developer/operator with the development fee mirroring what the developer would have received as the developer/joint venture partner

Key Ingredients To Structuring The Joint Venture Transaction

Understanding the roles of each joint venture partner Why is each joint venture partner in the deal?

(capital, operational/development know how or finder of the deal)

Who is to be responsible for capital short falls? Who is to be the operator of the property? Who is to provide guarantees required for project

financing?

Key Ingredients To Structuring The Joint Venture Transaction

Alignment of interests (the transaction will only work to the extent that there is a fair and reasonable alignment of interests with respect to financial responsibility and control)

Knowing and being comfortable with your proposed joint venture partner (a joint venture relationship is like a marriage, it won’t work without a reasonable degree of trust)

Agreeing to the deal structure through the preparation of a simple, short form term sheet that sets forth the material terms of the joint venture relationship (preparation of some form of term sheet is critical to insure that there is a meeting of the minds up front)

Top Ten Negotiated Provisions

Entity Governance: Member managed / management committee

Major decisions requiring member / management committee approval; restrictions on authority

Dispute resolution procedures for major decision deadlocks/disagreements Majority vote on management committee or super vote

for a member Invoking buy/sell provisions for certain deadlocks Deadlock: parties are just required to work it out Pre-project acquisition approvals; pre-closing agreement

Top Ten Negotiated Provisions

Degree of Control over Manager/Managing Member Leasing activities subject to agreed upon leasing

guidelines Expenditures subject to an approved annual budget

with agreed upon line item and cumulative variances

Use of Performance Hurdles

Top Ten Negotiated Provisions

Responsibility for Additional Capital Contributions and Remedies for Failure to Make Additional Capital Contributions For development transactions, imposing

responsibility on manager / managing member and capping responsibility

For non-development transactions, sharing of responsibility for capital shortfalls

Remedies for failing to make required capital contributions: capital contribution loans / additional capital contribution with penalty squeeze down/triggering of default / removal

Top Ten Negotiated Provisions

Distribution provisions and IRR / return calculations

Managing member’s responsibility to provide guaranties and indemnities in connection with project financing and continued liability under such guaranties and indemnities following removal

Right to remove the manager / managing member upon the occurrence of certain events

Exit strategies: forced sale of project / transferability of member interests / right of first offer in connection with sale of member interests

CAN’T WE JUST GET ALONG?