How Attractive is This Option?

1
Setting Up Joint Ventures

• How Attractive is This Option?
• Winter Forum on Real Estate Opportunity and
  Private Fund Investing
• January 27, 2005
• The Montage Laguna Beach, California

2
Panelists

• James Chiboucas
• General Counsel
• KBS Realty Advisors, LLC
• Steven C. Koppel
• Partner
• Heller Ehrman
• Sanford Presant
• National Director of Opportunity Funds
• Ernst Young LLP

• L. Bruce Fischer
• Partner
• Morgan, Lewis Bockius LLP
• Fred Pillon
• Partner
• Gibson, Dunn Crutcher LLP
• Michael Schwartz
• Broker
• George Smith Partners, Inc.

3
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

4
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

5
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

6
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?

7
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 wont 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)

8
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

9
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

10
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

11
Top Ten Negotiated Provisions

• Distribution provisions and IRR / return
  calculations
• Managing members 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

12
CANT WE JUST GET ALONG?