Exploring Joint Ventures: Opportunities and Challenges in Real Estate Investments

1. Setting Up Joint Ventures: How Attractive is This Option? Winter Forum on Real Estate Opportunity and Private Fund Investing January 27, 2005 The Montage • Laguna Beach, California

2. James Chiboucas General Counsel KBS Realty Advisors, LLC Steven C. Koppel Partner Heller Ehrman Sanford Presant National Director of Opportunity Funds Ernst & Young LLP L. Bruce Fischer Partner Morgan, Lewis & Bockius LLP Fred Pillon Partner Gibson, Dunn & Crutcher LLP Michael Schwartz Broker George Smith Partners, Inc. Panelists

3. Why Joint Venture The Deal? Is It Worth It? • Advantages to the Joint Venture Structure vs. Going It Alone • Increases the pool of investments available to investors • Allows investors to leverage their investments by investing in more properties • May provide operational and construction expertise to the investor • Provides property owners and/or operators with additional project equity without incurring additional debt

4. Why Joint Venture The Deal? Is It Worth It? • Disadvantages to Joint Venture Structure vs. Going it Alone • It is often times difficult to negotiate joint venture documents from both a time and cost perspective • There is almost always a greater loss of control by all parties then expected • The operator is often times required to give a greater portion of the economic upside then desired • The investor is often times required to assume responsibility for a greater portion of the economic downside then desired

5. Why Joint Venture The Deal? Is It Worth It? • Alternatives to the Joint Venture Structure Other Than Going It Alone • Origination of a mezzanine loan by the investor with the returns to which the investor is entitled mirroring what the investor would have received as a joint venture partner (may be easier and less costly to document then joint venture documents) • For development transactions, the entering into of a development management agreement by the developer/operator with the development fee mirroring what the developer would have received as the developer/joint venture partner

6. Key Ingredients To Structuring The Joint Venture Transaction • Understanding the roles of each joint venture partner • Why is each joint venture partner in the deal? (capital, operational/development know how or finder of the deal) • Who is to be responsible for capital short falls? • Who is to be the operator of the property? • Who is to provide guarantees required for project financing?

7. Key Ingredients To Structuring The Joint Venture Transaction • Alignment of interests (the transaction will only work to the extent that there is a fair and reasonable alignment of interests with respect to financial responsibility and control) • Knowing and being comfortable with your proposed joint venture partner (a joint venture relationship is like a marriage, it won’t work without a reasonable degree of trust) • Agreeing to the deal structure through the preparation of a simple, short form term sheet that sets forth the material terms of the joint venture relationship (preparation of some form of term sheet is critical to insure that there is a meeting of the minds up front)

8. Top Ten Negotiated Provisions • Entity Governance: Member managed / management committee • Major decisions requiring member / management committee approval; restrictions on authority • Dispute resolution procedures for major decision deadlocks/disagreements • Majority vote on management committee or super vote for a member • Invoking buy/sell provisions for certain deadlocks • Deadlock: parties are just required to work it out • Pre-project acquisition approvals; pre-closing agreement

9. Top Ten Negotiated Provisions • Degree of Control over Manager/Managing Member • Leasing activities subject to agreed upon leasing guidelines • Expenditures subject to an approved annual budget with agreed upon line item and cumulative variances • Use of Performance Hurdles

10. Top Ten Negotiated Provisions • Responsibility for Additional Capital Contributions and Remedies for Failure to Make Additional Capital Contributions • For development transactions, imposing responsibility on manager / managing member and capping responsibility • For non-development transactions, sharing of responsibility for capital shortfalls • Remedies for failing to make required capital contributions: capital contribution loans / additional capital contribution with penalty squeeze down/triggering of default / removal

11. Top Ten Negotiated Provisions • Distribution provisions and IRR / return calculations • Managing member’s responsibility to provide guaranties and indemnities in connection with project financing and continued liability under such guaranties and indemnities following removal • Right to remove the manager / managing member upon the occurrence of certain events • Exit strategies: forced sale of project / transferability of member interests / right of first offer in connection with sale of member interests

12. CAN’T WE JUST GET ALONG?