Originally published in Blakes Bulletin on Real Estate
Joint Ventures, October 2010
One issue arising in the negotiation of a real estate joint
venture buy-sell gunshot is that of "dissimilar
interests", for instance, if there were favourable or
unfavourable financing attaching to the interest of one joint
venture participant but not to that of the other, if the interest
of one joint venture participant attracted a preferential rate of
return, or if such interest carried with it the benefit of equity
purchase options at a price less than fair market value. The
buy-sell shotgun works well in the valuation of the respective
interests of joint venture participants when those interests are
similar in nature. Determining such valuation becomes more complex
when the interests of the joint venture participants are different.
Some mechanism is required in the joint venture agreement to value
the various beneficial aspects attaching to the interest of one
joint venture participant but not the other. Often, this is done
through the appraisal mechanism.
In certain joint venture arrangements, one joint venture
participant provides the other with financing at beneficial rates.
Such favourable financing enhances the value of the interest of the
borrowing joint venture participant. If the interest of the
borrowing joint venture participant is sold in a buy-sell shotgun,
such joint venture participant would not be compensated for the
value of its beneficial financing. On the other hand, if the
financing was due on sale, the beneficial financing would be lost
and no value should be attributed.
If one joint venture participant has charged its interest in
favour of the other joint venture participant as security for
payment of a preferential return for a specified period of time,
the valuation of the preferential return may be very difficult to
determine. One manner of dealing with this situation is simply to
prohibit the use of the buy-sell shotgun during the preferential
return period. However, this is not a terribly satisfying
Assuming that the preferential return of 10% per annum on the
purchase price for a five-year term was offered by one joint
venture participant to an investor joint venture participant as an
inducement to obtain an enhanced sale price on the sale of a 50%
interest to the investor joint venture participant and that the
project currently generated an 8% return, the interest of the
investor joint venture participant would have an increased value
due to the higher rate of return while, at the same time, the
interest of the borrowing joint venture participant would have the
benefit of the remaining 6% return, a depreciated value resulting
from the depressed return for the five-year preference term. The
problem is that no one can be certain what the return will be over
time. One approach is to adopt a "wait and see" approach
where, as a post-closing matter, the top-up continues to be
This does not operate as effectively if the shotgun is reversed.
The selling joint venture participant will be reluctant to have the
investor joint venture participant manage the project –
and thereby directly affect the return – while still
having to bankroll the preferential return when it is no longer in
control of the project and determining the manner in which the
project is to be operated.
Options are another problem in the context of the buysell
shotgun. In certain joint venture arrangements, one or more of the
joint venture participants grant to the other an option,
exercisable by written notice during a specified period of time to
purchase an additional equity interest in the project for a
stipulated price. The question then arises as to the manner in
which the option is to be valued if the buy-sell shotgun is invoked
prior to the exercise of the option. The optionee/ selling joint
venture participant should be entitled to receive a payment from
the optionor/purchaser joint venture participant after the date on
which the option is exercised equal to the amount by which the fair
market value of the interest to which the option applies exceeds
the option price as of such date.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Please join members of the Blakes Commercial Real Estate group as they discuss five key provisions of a commercial real estate purchase agreement that are often the subject of much negotiation but are sometimes misunderstood.
Emotional culture is influenced in great part by the mindset and actions of leadership, although employees also play more of a role than they may realize in creating the culture that exists in the group.
The session will be led by Dr. Robert Brooks, an award-winning author and psychologist. In his presentation, Dr. Brooks will describe the mindset and realistic practices of leaders and staff that help to nurture and sustain a culture characterized by positive emotions, satisfying, respectful relationships, a sense of meaning and ownership for one’s work, and enhanced job performance. Examples will be offered to illustrate strategies for developing a positive emotional culture in an organization.
Join leading lawyers from the Blakes Pensions, Benefits & Executive Compensation group as they discuss recent updates and legal developments in pension and employee benefits law as well as strategies to identify and minimize common risks.
Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).