As stated in our piece, “What’s Really Involved in a Real Estate Development Project?”, there may be a dozen different categories of legal work involved in a real estate project, each of which may themselves, in turn, involve many differing components. Only in a complex transaction might almost all these categories be simultaneously involved but sometimes they do in fact all come into play, and a real estate development of any size will certainly enlist a majority of these expertises. However, even a real estate acquisition or sale involving absolutely no development aspects will require expertise and skills found in many of these categories, if for no other reason than that the purchaser’s attorney will have to deal with the very same subjects and the seller’s attorney needs to be cognizant of all those issues which are being addressed by the other side.
A transaction where every single one of these subjects needed to be addressed at length was a recent hotel development in which we represented the developer through an 18-month process beginning prior to the contract for land acquisition and continuing to the closing of the construction loan. In fact, the development process had already been ongoing for six-months before the lawyers on either side were even called in.
During that time, as an indication of the lawyer’s proper roles, there was substantial due diligence being performed by the parties, and feasibility issues relating to size, scope, economics of the development, preliminary sketch plans, profitability of the hotel and like matters were thoroughly vetted, while the economic terms of the transaction were likewise under review and periodically revised. The entry onto the scene of the lawyers does, however, result in some modification of many of these elements as legal and business considerations not thoroughly treated by the parties are introduced to the stew.
The hotel was to be part of a large mixed-use development encompassing office towers, apartments, some retail, and a large industrial relocation. The national developer of the entire project was under an obligation to assure, by virtue of the representations it had made, that the major office tenant would have access to an on-site hotel in order to service its visiting employees and vendors, and had further represented that the hotel would be one which was officially recognized as being “upscale.”
Because of its continuing involvement, its need to assure a successful completion, and its ownership of remaining undeveloped portions of the project, at least until an anticipated sale after completion, the master developer took a small minority position in the hotel developing entity (as well as in the apartments) to complement its larger equity interest in the office towers, all with the objective of enabling better oversight and a degree of control, not least through the exercise of certain veto rights and takeover rights in the event the development did not proceed successfully.
Every element of these oversight and control functions had to be negotiated at length. This meant that there were not two (the usual instance of developer and its equity partner) but three parties to the negotiation of the developer’s partnership agreement. That agreement, whether it is an Operating Agreement for an LLC or a partnership agreement
for a limited partnership is the so-called “constituent” document which determines what everyone’s capital contribution is to be, what fees and other entitlements are to be allocated to the developer, what obligations each of the partners have with respect to additional capital if required, when and under what circumstances is capital and other available cash to be returned, and equally important from the developer’s standpoint, who makes the innumerable decisions which arise in the course of a development and, if it is not to be the developer in all instances, when and under what circumstances is some of that authority curtailed?
In addition to which there were of course the dozens of other questions which are common to any development partnership negotiation, but conducting these with two separate indispensable partners each of whom had interests in conflict made this much more than merely the addition of one more partner, since the developer’s attorney, in addition to needing to protect the developer’s interests, had to discuss and negotiate all these issues with each side before trying to sell, lay down lines, and then communicating objections to the other, only to retrace the steps in reverse, through each one of fourteen separate drafts of the partnership agreement.
The purchase agreement, by which the developer was to acquire the land, itself took more than three months to negotiate, involving the master developer’s insistence on reserving air rights above the hotel’s parking lot for the purpose of developing a combined garage and retail facility. The complexities involved in such a grant of air rights, affecting as it does utilization, integration with and its effects upon the hotel’s operations, title issues, and the prospective, but as yet unknown, development lender, were enormous. The usual panoply of development issues inherent in a mixed-use development, such as the variety of required easements, the CCR’s (Covenants, Conditions and Restrictions) governing the entire project and assuring minimum protections for the hotel, including, last but not least, controls with respect to the assessments which might be levied, were in the context of the larger discussion, relatively easier to get through.
In the second part of this piece, we will turn to raising the equity component of the development, the negotiation of the entity document reflecting the economic and business deal between the developer and its partners, hotel franchise issues, title, unique parking problems, and finally, the development or construction loan.
