In the old days a sponsor found a deal to buy a real estate asset and called up a financial party (either a fund or other institution). They would form a joint venture and purchase the asset and that would be that. Of course those – relatively simple – deals continue today; however, more and more we see clients entering into a more long-term relationship.
Here are some (philosophical?) perspectives on the various types of relationships that can ensue between sponsors and financial partners. Since I have been (happily) married for over thirty years — and therefore know nothing about dating — I thought I would relate my thoughts here to the dating process.
The first level is the one I mentioned above, i.e. the sponsor finds deals on a one-off basis and when she finds a deal goes around to money partners until one is interested. Then they form a joint venture and close. I would call this casual dating since no one is obligated to do more than the single deal at hand.
The second level is what is often called a “programmatic relationship.” This is where the sponsor and the financial partner enter into what we called a “Deal Production Agreement”, although there are other names for these types of arrangements. Basically this means that the sponsor will seek out deals and give the financial partner “first dibs” on the deals. Often the financial partner asks for exclusivity (or at least the first look) and sometimes the sponsor asks for the financial partner to pay part of its overhead or pursuit costs in return; however, these issues are typically heavily negotiated on both sides. By the way, sometimes there is no agreement at all and the parties just handshake that the sponsor will show the deals to the financial partner and they will try to work together. I would say this is like going steady (for old-timers) or being “in a relationship” (for people in the middle) or “making it Facebook official” (for the millennials).
The third level is a formal agreement to form a Newco, which is a joint venture between the Sponsor and the Financial Partner. Newco will be used to do new deals, with typically Newco forming a special purpose subsidiary for each deal. The Sponsor will pre-agree to post a certain (smaller) percentage of the capital needed for the new deals done by Newco and the Financial Partner will agree to post the rest. There are quite a number of important issues to be negotiated in these types of arrangements since the parties are really joined together. For example, are deals “crossed? Can the Sponsor do the deal without the Financial Partner if the Financial Partner disapproves the deal? How much discretion does the Sponsor have? What if the Financial Partner just doesn’t fund any deals what can the Sponsor do about it? How does the promote split work – does the Financial Partner get its pro rata share of the promote or some smaller amount; does the Financial Partner pay a promote or not?; does the Financial Partner participate in the payment of fees or receive a portion of any fees? Going back to the dating analogy, this is like moving in together, but you aren’t really married yet – with the added twist that, when you move in together, you invariably need to think about how much you want to share and how much you want to keep separate. But, at the end of the day, in a program, typically each party keeps its own business and if there is a divorce they are (moderately) easily able to go their separate ways.
The fourth – and final – level is typically called a “Platform Investment.” To start off with our analogy, this is truly getting married. In these types of deals, the Financial Partner invests directly “into” the Sponsor or, alternatively, just purchases the Sponsor whole-hog. Often the theory is that the Financial Partner will have access to everything the Sponsor does plus the ability to recapitalize existing deals plus a share of promotes and even fees. In return the Sponsor now is more credible in the market with the real backing of a major financial player. Often, these transactions are used to set the stage for an eventual IPO and/or to grow the sponsor’s business. Sometimes the goal is to have the now-recapitalized Sponsor raise a fund, using the Sponsor’s reputation and the Financial Partners financial backing, and sometimes the goal is just to do future deals as a team. These deals are very intricate and involve significant negotiation. There are numerous issues but some of the big ones are the valuation of pre-existing deals and whether and to what extent the Financial Partner participates in pre-existing promotes and future promotes, the split of fees between the Sponsor’s principals and the Financial Partner, the allocation between fees and promotes where the Financial Partner has different participation rights depending on the income stream, the nature of incentive compensation arrangements, the ability to reinvest funds into the business, the extent of future funding obligations of the Financial Partner or Sponsor, the ability of the Sponsor to raise additional capital from alternative sources, corporate loan facilities, discretion and decision-making, buy-out rights, the terms of an eventual unwind, and the degree of non-compete that the Sponsor’s principals will have to agree to.
Duval & Stachenfeld is right in the middle of all of this. And what we are seeing is a gradual gravitation from the simpler deals to the programmatic to the formation of Newco’s and all the way to the platforms. Indeed, we are seeing more platform deals than we have ever seen before. My sense – as I survey the real estate industry – is that Financial Partners are fearful of being locked out of the “good deals” if they are not right in on the ground floor with a high-quality sponsor seeking those deals. Correspondingly, the Sponsors are fearful that if they don’t have credible and real financial backing they will not be able to compete for the “good deals” as the sellers will gravitate towards buyers who have the ready cash to be able to perform.
Now for the sales pitch part of this – sorry……
At Duval & Stachenfeld, we have an entire team of lawyers that have dedicated their careers to corporate real estate transactions. Our Corporate Real Estate Group consists of over 20 lawyers and is one of the largest of such practice groups anywhere. But, unlike the corporate groups of most of our peer firms, our Corporate Real Estate Group focuses exclusively on real estate transactions, and this translates into a distinct competitive advantage for our clients in the area of corporate real estate because, put simply, we understand how real estate businesses work from top to bottom!
Notably, over the last five years, our Corporate Real Estate Group has spearheaded some of the most high profile transactions in this space including the formation of several up-and-coming emerging manager and operator platforms, the recapitalizations of several name-brand existing platforms, the launch of new business-lines by marquis managers through the formation of multi-tier joint venture or other arrangements for the establishment of new programs, and a host of other transactions (the list of which is too long to summarize).
Finally, there is one additional piece of information that is crucial to why the Corporate Real Estate Group at Duval & Stachenfeld is different from similar groups at our peer firms. The practice– and in particular the practice in the specialty area of programmatic and platform arrangements – fits seamlessly with our core business model — which is “to help our clients build their businesses.” Put simply, if you are considering any of the above transactions it is great to call us for two reasons:
First – of course we know how to do the necessary legal work – as it is our core specialty
But second – we have a wealth of counterparties – Sponsors and Financial Partners – many of whom are looking for high-quality counterparties to team up with through casual dating, going steady, moving in together or even getting married.
So if you are planning to team up with someone in the real estate world, please feel free to reach out to our Corporate Real Estate Group.