We are close to entering into a JV agreement with a U.S. company for a large ground-up construction project for an industrial complex in the Western U.S. Along with our partner, we would like to sell the property a year or two after stabilization because both groups would like to reinvest in other opportunities. We like to move quickly so we do not want to get stuck in a situation where we are tied to a JV deal because the exit strategy and language was not properly thought out. What are the keys to a clean exit in a JV commercial real estate deal?
We recommend using a variety of liquidity mechanisms, including the right to force a sale of the property (subject to a right of first offer in favor of the other JV partner) and what are commonly called "buy/sell" provisions. These provisions can be somewhat complex and nuanced, so I suggest retaining a good US counsel experienced with joint ventures to assist you in your negotiation.
You are asking for a way to mitigate market risk at the front end of the deal? A buy/sell or selling your interest in a secondary market would be about it.
Good question. I assume you are the majority shareholder in this JV. It would be important for the majority to have the say on disposition and a drag-along right if the minority doesn’t want to sell. Another scenario would be a buy/sell right if one party doesn’t want to sell and the other party buys them to exit.
For construction deals it is often difficult to predict the exact timing of the exit especially if are potential delays in construction or stabilization. If timing for your exit is essential I would suggest to have a “put option” placed in the JV agreement. The put option can be useful where you can choose to exercise it or not to when the time comes. However, it would give you flexibility. You will need to negotiate on the conditions for the put option. For example, if stabilization is not achieved during a certain time, you may exercise the right to exit. Whether it is a forced sale of the asset or for the JV partner to buy your interests it is up for negotiation.
There are a number of possibilities that every sophisticated lawyer to enable the parties to exit a joint venture. There should always be a buy-sell provision, whereby one venturer can buy the other out. There can be a forced sale of the property at a pre-designated point of time. There can be a "baseball" arbitration to select a sale price. These and more possibilities need to be discussed with your current advisor, who should be able to create solutions depending on the desires of the parties. In circumstances where one party has more capital than the other, your advisor should offer advice, depending upon the position you are in.
The key is to have one or more mandatory, unequivocal methods of liquidation or buyout. To be more specific would require considerable more facts.
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