Developers discuss formation of joint ventures

Real Estate Weekly, March 30, 1994 by Lois Weiss

Three local real estate experts discussed ways developers can find and structure joint ventures at the National Realty Club luncheon last month. The members meet at the 60 East Club to hear speakers on subjects relating to real estate ownership.

William Lie Zeckendorf, executive vice president of Zeckendorf Realty, who represents the third generation of the Zeckendorf real estate family, said they work with joint venture sources of capital and have participated in over 110 joint ventures. Usually, the capital partners contribute a disproportionate amount of equity, he explained. The company has also been involved in service joint ventures with banks.

Because the traditional lending sources of 1980 are no longer available, Zeckendorf said "The bigger gap between equity and debt will be filled in with foreign investors and merchant banks providing bridge capital." But money, he observed, is very expensive. "We're running against 18 percent," he added.

Joint venture workouts are petering out, Zeckendorf said, expecting to only be involved in perhaps one or two more.

The company is currently working in a joint venture with European American Bank to sell 75 CitiSpire condominium units. CitiSpire is the second tallest residential building in the world and with its location on 57th Street near Carnegie Hall, provides views of Central Park and byond. "We structured it as a joint venture and we took fees and a profit override," Zeckendorf said. They have sold around 70 apartments in the last nine months and expect to sell out by the end of this year.

The Zeckendorfs have also purchased the top eleven floors of the Lincoln Square project. The purchase was recently enhanced by the new Lincoln Center zoning rules that will make that building the tallest in the area, forever guarding those breathtaking views. Sumitomo contributed a large portion of the capital while the Zeckendorfs will handle marketing and sales of the 83 apartments. The campaign is expect to begin in May with prices set at "north of" $500 a square foot. Zeckendorf said, "I think the market is ready for it."

Working with W&M Properties and Anthony Malkin, the younger Zeckendorf is also managing the Mondrian at 250 East 54th Street, recently purchased by investor Kirkpatrick MacDonald at auction. "We're working to get a percentage of that transaction as well," Zeckendorf said. "We all want to get the best bottom line."

Attorney Thomas Keltner, a partner with Wien Malkin & Bettex, elaborated on options for joint ventures, particularly with foreign money. Usually, the foreign investors are looking for a manager, as well, so the U.S. manager takes on an asset manager role. Keltner advises structuring a deal so the U.S. manager can take a fee basis that might be, for instance, an override on excess profits above a hurdle rate. He believes cash flow should be formulated in terms of U.S. dollars.

Keltner also suggests identifying someone both parties have trust in for mediation.

A buy/sell mechanism is often used in the joint venture contracts so if there is a conflict, a party will name a price and the other must either buy it or sell it for that amount.

In most cases, the foreign partner is better able to execute the buy/sell because they have the money, he noted, while the U.S. manager is better able to handle the building. In structuring such a buy/sell deal, Keltner advises that in order to even the positions, there should be a requirement that the foreigner should keep on the U.S. manager under a fee basis or, if the U.S. buyer wants the building, for the foreigner to finance the purchase for one year.

"I've never actually seen anyone initiate a buy/sell to the end," he added, deeming its real purpose to force compromise.

Roger Brown, senior vice president and Northeast regional manager of Heller Financial Services, a wholly owned subsidiary of Fuji Bank, provides both debt and equity for transactions and also participates in first or second mortgages. Last year, the company lent about $630 million on 120 different transactions. Their emphasis is in smaller, participating deals but they will also provide letters of credit - which they are moving away from - and standby loans.

Heller is active in participating in the construction of multi-family homes in the Southwest and Southeast and this coming year, Rogers expects they will see more development in the Washington, DC and Maryland area. They are reducing their concentration of office deals and are down to 20 percent of their total commitments from 40 percent a few years ago.

They prefer becoming involved in apartments, industrial and retail enter-prises, and mobile home parks. Often, they work with experienced local buyers who focus on a business plan with an upside of three to five years.

The buyers usually contribute between 5 percent and 10 percent equity and Heller Financial will supply the rest. They will receive 8 percent to 10 percent interest and allow the borrower a return on his equity. "We are passive investors and not involved in day-to-day operations," explained Rogers.