{"id":1004122789,"date":"2015-07-08T10:30:41","date_gmt":"2015-07-08T18:30:41","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004122789"},"modified":"2022-12-08T19:22:55","modified_gmt":"2022-12-09T03:22:55","slug":"prospective-real-estate-jv-partners-take-heed","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/prospective-real-estate-jv-partners-take-heed\/","title":{"rendered":"Prospective RE JV Partners, Take Heed"},"content":{"rendered":"

By Michael Scheinberg, Partner, Pircher, Nichols & Meeks\"Scheinberg\"<\/a><\/em><\/p>\n

With the pace of real estate joint venture (JV) transactions in the current market, investors and sponsors often enter into a preliminary \u201cpursuit agreement<\/u><\/em>\u201d relating to pre-closing pursuit cost sharing and decision making, even before concluding negotiation of JV terms.\u00a0 Not having such an agreement could lead to unexpected and undesirable results (such as a sponsor paying for 100 percent of \u201cdead deal\u201d pursuit costs or an investor losing the deal to another capital source).<\/p>\n

Some points often covered in such a pursuit agreement include:<\/p>\n

Budget<\/u><\/strong> The prospective venturers can avoid surprises and future disagreements if the sponsor reaches an agreement with the investor on a budget for shared pursuit costs and the identity of consultants and counsel to be engaged.\u00a0 Examples of shared costs include purchase agreement (PSA) deposits, fees to consultants and legal counsel, and lender underwriting and expense deposits.\u00a0 Significant costs incurred before signing the pursuit agreement can be scheduled.<\/p>\n

It is also advisable to call out any costs that will not be shared.\u00a0 For example:\u00a0 (a) prospective venturers might agree to bear their own legal costs for negotiating the JV, even if the JV closes (otherwise, a majority investor will bear most of the costs for tough negotiations by the sponsor, though \u201cpay your own\u201d can lead to a sponsor pushing the drafting work to the investor\u2019s counsel); and (b) only one venturer might be responsible for finder\u2019s fees payable to a broker that introduced the parties.<\/p>\n

Sharing of Pursuit Costs<\/u><\/strong> The allocation of pursuit costs for a dead deal is often different from JV percentage interests, with the sponsor bearing a larger share than its JV percentage interest (e.g., 50 percent rather than 10 percent).\u00a0 If the deal closes, there can be a \u201ctrue-up\u201d to JV percentage interests.\u00a0 Further, if one prospective JV party loses interest in the deal and \u201cwithdraws\u201d before<\/u><\/em> the expiration of due diligence, the other party is often permitted to move forward alone (or with a new third-party partner) so long as it reimburses the withdrawing party if there is closing.\u00a0 However, if the withdrawing party elects to not proceed with the deal after the expiration of due diligence, the withdrawing party is often required to forfeit its share of pursuit costs (unless the withdrawing party can negotiate for reimbursement from the continuing party if the deal actually closes).<\/p>\n

Exclusivity<\/u><\/strong> Typically, an investor that agrees to cover a share of pursuit costs will demand the exclusive right to be the equity capital source investor for the deal.\u00a0 Sometimes, an investor will require exclusivity simply to evaluate a prospective deal beyond an initial expression of interest.\u00a0 Of course, a sponsor partner is more likely to be able to accept exclusivity in favor of the investor if the preliminary agreement includes an outline of the primary JV terms (such as distribution waterfall, additional contribution obligations, decision making control, affiliate agreements and fees and the general outline of a business plan).<\/p>\n

Decision Making Under PSA<\/u><\/strong>\u00a0 Investors typically will require input over pre-closing decisions under a PSA once they have committed pursuit costs to a deal.\u00a0 However, a sponsor with some leverage may be able to maintain a voice on these decisions, for example, where the sponsor has the PSA signed up in its name and established relationships with many prospective capital sources.<\/p>\n

Go-Hard Decisions and Re-Offer<\/u><\/strong> Understandably, both parties will want a \u201cwalk\u201d right before due diligence ends. Some investors will condition the sharing of costs on the sponsor giving up a walk right.\u00a0 Ideally, the JV agreement will be finalized by due diligence expiration, though there are ways to work around the absence of a final JV agreement.\u00a0 It is also not uncommon for a withdrawing party to request the right to get back in if terms become materially more favorable (through negotiations with a seller or otherwise).<\/p>\n

The bottom line is that a general understanding among potential venturers at the outset, with any available detail, can help avoid costly misunderstandings and facilitate a successful closing.<\/p>\n

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By Michael Scheinberg, Partner, Pircher, Nichols & Meeks: With the pace of real estate joint venture transactions in the current market, here’s what investors and sponsors need to avoid potential pitfalls.<\/p>\n","protected":false},"author":1619,"featured_media":1004122802,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[37301],"tags":[],"class_list":["post-1004122789","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"acf":[],"yoast_head":"\nProspective RE JV Partners, Take Heed - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/prospective-real-estate-jv-partners-take-heed\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Prospective RE JV Partners, Take Heed\" \/>\n<meta property=\"og:description\" content=\"By Michael Scheinberg, Partner, Pircher, Nichols & Meeks: With the pace of real estate joint venture transactions in the current market, here's what investors and sponsors need to avoid potential pitfalls.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/prospective-real-estate-jv-partners-take-heed\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2015-07-08T18:30:41+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-12-09T03:22:55+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/07\/Scheinberg-Headshot-2014.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"256\" \/>\n\t<meta property=\"og:image:height\" content=\"235\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Michael Scheinberg\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/prospective-real-estate-jv-partners-take-heed\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/prospective-real-estate-jv-partners-take-heed\/\",\"name\":\"Prospective RE JV Partners, Take Heed - 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