General
Against the backdrop of a maturing domestic market and the continued search for growth in overseas real estate, Japanese companies have continued to expand their investments in U.S. real estate. Recent activity by major Japanese residential players, including merger and acquisitions by Sumitomo Forestry and Sekisui House of reputable local real estate companies, illustrates the continuing interest in the U.S. market, particularly in residential and development-oriented opportunities. This newsletter focuses on a typical joint venture structure in which a Japanese investor participates in a development project by forming an LLC with a local real estate developer, and outlines key issues under the limited liability company agreement, including capital contributions, distributions, management rights and exit strategies.
One key practical advantage of the joint venture structure is that the project can proceed after land acquisition while leveraging the local developer's development track record, construction management capabilities, lender relationships and leasing expertise. As the legal vehicle, a limited liability company ("LLC") is commonly used because of its pass-through tax treatment, limited liability and contractual flexibility, although tax treatment should be confirmed on a transaction-by-transaction basis.
In a local joint venture structure, the Japanese investor and the local developer enter into a limited liability company agreement ("LLCA") and form a joint venture LLC. Typically, the local developer serves as the managing member ("MM") and is responsible for day-to-day operations, while the Japanese investor participates as the non-managing member ("NMM"), contributing capital and monitoring the investment through consent rights, information rights, document inspection rights and related protections.
In this structure, the local developer will take the lead in communications with project-related parties, including the land seller, title company, consultants, architect, general contractor and lenders. The Japanese investor, on the other hand, negotiates the LLCA with the local developer and concurrently reviews the land acquisition status, development approvals, environmental risks, zoning, the construction contract, the construction loan agreement or term sheet, and the local developer’s track record and litigation history. Because the LLCA operates together with the construction loan agreement, construction contract, completion guarantee and related documents, consistency among these documents should be confirmed at an early stage.
The core function of the LLCA is to allocate development risks, funding obligations, management authority and exit rights between the MM and the NMM. In particular, the allocation of cost overruns, permitting risk, construction risk and project completion risk is reflected in the provisions governing capital contributions, distributions, management and exit rights. What follows are brief descriptions and functions of those core provisions of the LLCA.
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Author:
Takeshi Nagai (Partner)