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

Panelists
James Chiboucas
General Counsel KBS Realty Advisors, LLC

L. Bruce Fischer
Partner Morgan, Lewis & Bockius LLP

Steven C. Koppel
Partner Heller Ehrman

Fred Pillon
Partner Gibson, Dunn & Crutcher LLP

Sanford Presant
National Director of Opportunity Funds Ernst & Young LLP

Michael Schwartz
Broker George 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 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)

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 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

CANT WE JUST GET ALONG?