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Real Estate Joint Venture Toolkit (90/10 Real Estate Joint Venture)
Practical Law Toolkit w-008-2642 (Approx. 22 pages)
Real Estate Joint Venture Toolkit (90/10 Real Estate Joint Venture)
by Practical Law Real Estate
| Maintained • USA (National/Federal) |
Resources to assist investors, developers, and other parties interested in forming a sophisticated commercial real estate joint venture (JV). This Toolkit guides JV parties in identifying and addressing key business and legal terms in JV agreements and offers invaluable, time-saving drafting and negotiating guidance.
Real estate developers and investors often partner to create a joint venture (JV) to own, develop, and operate commercial real property. The property might be a retail center, office building, hotel, apartment complex, condominium project, industrial facility, or real estate for any other use, or combination of uses. By joining forces, no party takes on the full burden of funding, acquiring, developing, and operating commercial property.
JV parties typically memorialize their agreement in the form of a limited liability company (LLC) agreement or a limited partnership (LP) agreement (either, a JV agreement). JV agreements are typically complex agreements dictated by the business terms negotiated between the parties. For example, the capital contributions section may be drafted several different ways depending on how the parties agree to contribute their equity (both initially and if additional capital is needed) and the distributions provisions will vary depending on the waterfall distribution structure the parties negotiate.
This Toolkit is designed to help JV parties:
- Identify common concerns and potential solutions.
- Minimize the time and expense of negotiating critical business and legal issues.
- Effectively and efficiently draft an agreement reflecting the parties' needs and business agreement.
This Toolkit offers:
- A base form of LLC agreement that:
- is drafted as a comprehensive, complex LLC agreement;
- identifies clauses where business terms are heavily negotiated and for those sections, provides one alternative clause in the body of the agreement and links to alternate provisions reflecting more complex business terms in the corresponding Drafting Note;
- provides consistent defined terms throughout all of the alternate provisions; and
- gives drafting guidance for both parties.
- Standard Clauses containing alternative provisions for sections where business terms dictate the drafting.
- Seamless JV agreement drafting, allowing the drafter to start with the base form LLC agreement and choose the appropriate clause (whether in the body of the LLC agreement or in an alternative Standard Clause) to reflect the agreed business terms.
- Practice Notes, Standard Documents, Checklists, and Charts that complement the detailed language and drafting guidance in the base form LLC agreement and Standard Clause alternatives.
While there is no "one size fits all" for a complex real estate JV arrangement, having a base form and Standard Clauses with common approaches to choose from, a drafter can create efficiencies in drafting and avoid inconsistencies.
Heavily negotiated business terms often include:
- The management structure of the JV's business.
- The members' approval rights over certain major decisions of the company.
- The parties' ability to or restrictions on any:
- transfer of JV interests; or
- exit from the project.
- The obligations of each party to contribute money, property, services, or otherwise to the JV.
- Distributions of money to the JV parties.
- The process for disposing the JV's assets.
- Tax allocations, benefits, or liabilities.
Notes for using this Toolkit:
- No specific formation or organizational guidance. This Toolkit is not designed to guide the parties in the particular formation of or organizational requirements for any particular entity. For guidance in that area, the drafter should check and conform to state-specific requirements.
- Governing law. Real estate JVs are often organized under the laws of the State of Delaware. A second entity is typically formed (usually an LLC or an LP) as a wholly-owned subsidiary of the JV to own the real estate. This entity is typically formed in the state where the real property is located. While the resources identified in this Toolkit are useful in all states, the parties should consult local counsel and become familiar with local laws applicable to the states in which they form any entities.
- Ownership structure. Because real estate JVs are often structured with one member investing a significant amount of capital and another investing property, development services, management, or other expertise, the base form LLC agreement and many of the Standard Clause alternatives assume this structure (a 90/10 split of ownership). Those resources can be easily modified to fit the parties and the deal terms.
- Mix and match clauses. Sometimes the JV parties' business arrangement dictates using only some of the language in a Standard Clause or a combination of provisions from more than one Standard Clause. This is acceptable and encouraged. The Standard Clause alternatives are designed for maximum drafting flexibility, offering many business solutions for the drafter to incorporate as needed.
Drafting the JV Agreement: Form and Standard Clauses
Management Alternatives
- Standard Clauses, Management Provision in a 90/10 Real Estate Joint Venture (Operating Member Manager) (where the operating member manages the daily activity of the LLC).
- Standard Clauses, Management Provision in a 90/10 Real Estate Joint Venture (Operating Member Manager Subject to Executive Committee or Board of Managers Approval) (where the operating member manages the daily activity of the LLC but its control is limited to executive committee or board of manager approval).
- Standard Clauses, Management Provision in a 90/10 Real Estate Joint Venture (Co-Managing Members) (where the members jointly manage the daily activity of the LLC).
Transfer of Interests or Exiting the JV Alternatives
- Standard Clause, Transfer of Membership Interest in a 90/10 Real Estate Joint Venture (Base Provision) (requiring consent of the members for transfers, except that no consent is required for transfers to affiliates or transfers by the investor member to institutions).
- Standard Clause, Transfer of Membership Interest in a 90/10 Real Estate Joint Venture (Investor Member Right of First Refusal) (allowing the investor member to freely transfer its interest, but limiting transfers by the operating member to a lockout period, a right of first refusal, and a qualified manager standard).
- Standard Clause, Right of First Offer Clause (90/10 Real Estate Joint Venture Agreement) (providing the investor member the right to initiate a sale of its interest in the company, or of the company's interest in the property owner, subject to a right of first offer in favor of the operating member).
- Standard Clause, Forced Sale Clause (90/10 Real Estate Joint Venture Agreement) (providing the investor member the right to force a sale or disposition of the property, subject to a right of first offer in favor of the operating member).
- Standard Clause, Buy/Sell Provision in a 90/10 Real Estate Joint Venture (where the members can part ways by one member buying the interests of the other member).
- Standard Clause, Drag Along and Tag Along Clause (90/10 Real Estate Joint Venture) (clauses imposing requirements on the sale of a member's interest to a third-party purchaser).
- Standard Clauses, Closing Mechanics on Exit Provision in a 90/10 Real Estate Joint Venture (outlining closing mechanics for the sale or transfer of a member's interest, whether to the other member or a third party).
Initial Capital Contributions Alternatives
- Standard Clauses, Initial Capital Contribution Provision in a 90/10 Real Estate Joint Venture (Base Provision) (where each member contributes cash as its initial contribution).
- Standard Clauses, Initial Capital Contribution Provision in a 90/10 Real Estate Joint Venture (Operating Member Credit; Investor Member Installments) (where the operating member is credited for contributions made to the project before forming the JV and the investor member makes cash contributions in installments).
- Standard Clauses, Initial Capital Contribution Provision in a 90/10 Real Estate Joint Venture (Contributed Property) (where the property was acquired by the property-owning entity and the operating member contributes the ownership interests in the property owner to the JV).
- Standard Clauses, Initial Capital Contribution Provision in a 90/10 Real Estate Joint Venture (Part Loan, Part Equity) (where capital contributions are made partially as equity contributions and partially as member loans).
Additional Capital Contributions Alternatives
- Standard Clauses, Additional Capital Contribution Provision in a 90/10 Real Estate Joint Venture (Base Provision) (where the members must consent to any additional capital contributions and if a member fails to fund, the non-defaulting member has the option to make a default member loan or a shortfall contribution and dilute the defaulting member's percentage interest).
- Standard Clauses, Additional Capital Contribution Provision in a 90/10 Real Estate Joint Venture (Operating Member Obligation) (where the operating member must fund additional capital for costs above the development budget and for operating expense deficits).
- Standard Clauses, Additional Capital Contribution Provision in a 90/10 Real Estate Joint Venture (Member Cap) (where the members must make additional contributions up to a specified capped amount and after that time additional contributions are optional).
- Standard Clauses, Additional Capital Contribution Provision in a 90/10 Real Estate Joint Venture (Default Member Loan Converts to Capital) (where the members must consent to any additional capital contributions and if a member fails to fund, the non-defaulting member can make a default member loan that can be converted to a shortfall contribution (with dilution of the defaulting member's percentage interest in the JV) if not repaid within a specified period of time).
Distributions Alternatives
- Standard Clauses, Waterfall Distribution Clause in a 90/10 Real Estate Joint Venture (Base Provision) (distributions in accordance with the members' percentage interests).
- Standard Clause, Waterfall Distribution Clause in a 90/10 Real Estate Joint Venture (with Promote and Preferred Equity) (return of preferred equity and a preferred return to the members and payment of a promote to the operating member).
- Standard Clause, Waterfall Distribution Clause in a 90/10 Real Estate Joint Venture (Tiered Promote) (tiered promote payment to the operating member based on increasing returns to the members).
- Standard Clause, Waterfall Distribution Clause in a 90/10 Real Estate Joint Venture (with Preferred Return; No Promote) (preferred return for the investor member and no promote for the operating member).
JV Agreement Drafting and Negotiating: Additional Resources
Alternatives to Base Form for Less Sophisticated Transactions
- Standard Document, LLC Agreement (Single Member) (where the LLC has only one member which handles all management and decision making).
- Standard Document, LLC Operating Agreement (Commercial Real Estate, Managing Member-Managed, Short Form) (the JV has multiple members and one of the members manages the JV).
- Standard Document, LLC Operating Agreement (Commercial Real Estate, Member-Managed, Short Form) (the JV has multiple members and the members share management responsibility for the JV).
- Standard Document, Limited Partnership Agreement (Commercial Real Estate, Short Form) (DE) (where a limited partnership agreement is typically used in the jurisdiction rather than an LLC agreement).