Structuring Real Estate Joint Ventures to Address Loan and Manager Defaults, Bankruptcy, Distressed Property

Description

The term of a joint venture agreement might extend well beyond the current real estate boom. Counsel must include provisions which contemplate contingencies such as manager defaults or “bad boy” acts under the JV agreement, defaults on a mortgage or other financing, and bankruptcy. If the property is perceived to be underperforming or mismanaged, the investor will want the right to act swiftly to protect its investment, particularly in connection with the removal of the real estate operator from its role as the manager.

In addition to removal of the operator as manager, investor protection may include minimizing or extinguishing the operator’s right to promote and other income, and terminating third-party contracts entered into by and benefitting the operator. Conversely, the operator will want to protect its position by seeking notice and cure rights, restricting the definition of removal events, and negotiating the degree of loss of promote and other rights after removal.

In most JV agreements, the investor will insist upon including a set of “Significant Removal Events.” These include nonrecourse carve-out type defaults including criminal activity, fraud and misappropriation. Other matters that can trigger a Significant Removal Event include a “Key Man” event, voluntary and involuntary bankruptcy, the manager taking specific material actions without obtaining the investor’s approval, prohibited transfer, and gross negligence or intentional misconduct.

Listen as our authoritative panel discusses provisions which should be included in real estate joint ventures to address the potential downside to the transaction, the rights of the parties in the event the investors seek to remove the operator, and the impact of removal on distributions, buy-sell provisions and third-party arrangements.