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Family Offices and Direct Investments in Real Estate

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fam ily office, an underlying them e is a desire by fam ily offices to obtain and m aintain a heightened level of control over their investm ents. STRUCTURE OF DIRECT REAL ESTATE INVESTM ENT Few fam ily offices em ploy full-tim e real estate professionals and m anagers. In order therefore to invest directly in a real estate asset, those fam ily offices often designate an experienced real estate operator capable of handling the day-to-day activities associated with such an investm ent. This could take the form of a m anagem ent arrangem ent with a real estate operator, paying the m anager a fee based on a percentage of revenues. Alternatively, the fam ily office m ight own the property and ground lease the entirety to a developer and/ or operator on a long-term basis. Perhaps the m ost com m on structure, however, is to co-own the property through a joint venture with a real estate operator who acts as m anaging m em ber of the venture. In this scenario, the operator typically takes a relatively sm all equity stake in the venture with the fam ily office holding an outsized m ajority interest (while the equity split varies, a five to ten percent interest on the part of the operator is typical). THE JOINT VENTURE AND PROTECTIVE RIGHTS Be Careful W hat You Bargain For ? The (Un)Int ended Result of Prot ect ing Your Right s As noted above, the shift toward direct investm ent by fam ily offices is often based on a desire to assert greater control over decisions relating to the asset and its m anagem ent. In a joint venture with a real estate operator, the operator is generally the m anaging m em ber and the party in control of the day-to-day decision-m aking for the venture. As a bulwark to the significant level of control exerted by the m anaging m em ber, the fam ily office will typically bargain for the right to approve certain m ajor decisions. To protect these m ajor decision approval rights, two im portant enforcem ent m echanism s are often em ployed in the joint venture agreem ent: (i) the right to buy-out the operating partner (whether as a call right or through a buy-sell m echanism ) in the event of a deadlock over a m ajor decision, and (ii) the right to rem ove the operating partner in the case of a breach (such as taking an action without obtaining the required approval of the fam ily office). In either case, a change in control of the asset m ay be the result of enforcing such safeguards, a potentially problem atic outcom e. PRACTICAL PROBLEMS ASSOCIATED WITH ENFORCING YOUR RIGHTS Contractual Issues A forced change in control of the asset m ay pose specific problem s from a financing perspective. If the acquisition was financed with a third party lender, as is usually the case, the financing docum ents will m ost often prohibit a change in control without the lender ?s consent, as the lender would have underwritten its financing based on the reputation and experience of the operating partner, and possibly the creditworthiness of the affiliate of the operating partner providing any necessary guaranties. It is not surprising then that lenders will often insist Legal St r at egies Dir ect In vest m en t s in Real Est at e 26 I Th e Fam ily Of f ice Real Est at e M agazin e January 2019

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