Will your legal structure help or impede the sale of your MPC?May 20, 2019
By Rachel Wilson
The best time to consider your exit strategy is before the first patch of dirt is turned.
Every Master Planned Community is for sale, every day, if the price is right. That simply is the nature of almost any development, especially if the owner has a fixed life fund holding the asset.
What does that mean for the developer and the equity? It means that this exit strategy has to be incorporated from day one or you'll end up looking unprepared and shortsighted when the call comes that Land Advisors or Eastdil is being lined up.
Here's how it usually plays out: Your equity investors say it's time to put your community on the market. The rush begins to engage a broker, set up a data room, and think about what your LOI will look like.
While it may seem like the sale process is only just beginning, the process began long ago, as you negotiated lot sales contracts, recorded CC&Rs, established districts and entered into various agreements for the development of your MPC. All of those documents will be scrutinized during your sale process, with each owner-friendly and transfer-favoring provision helping the sale move more quickly and easily.
Ensuring Your MPC is Sale-Ready
In the first of a two-part series, here are five of our top ten recommendations for what to include – or avoid – whenever possible to help ensure that your MPC is sale-ready.
1. Assignability of Agreements
Builder contracts, construction and consulting contracts and other unrecorded agreements should be freely assignable by the owner, at least in the case of a bulk sale of the MPC. In other words, avoid provisions requiring that you get consent to an assignment of an agreement from a counter-party, or that you give that counter-party notice prior to assignment.
At the very least, having contracts that are freely assignable will minimize delays, legal fees and other transaction costs. In extreme situations, it may be the difference in whether your MPC sale closes, if a buyer insists on having certain consents in place prior to closing. You will get some pushback as builders (not inappropriately) argue that they are buying into the community because of the developer and the vision. For that reason, you'll often end up with compromise language to give all the parties comfort. We've negotiated these with every large builder and are happy to share our feedback.
2. Estoppels under Agreements
Contracts that require the counter-party to deliver an estoppel upon request don't guarantee that you'll get an estoppel when you ask for one. But in our experience, you're more likely to get a completed estoppel from a counter-party when your contract requires one than when it doesn't..
In most MPC sales, a buyer (and its lender or equity source) will require estoppels from a critical number of homebuilders and contractors. Being able to point to a contract provision requiring delivery of an estoppel within a set time frame will help a seller get to that critical number that much faster.
3. Assignability of Favorable Rights
MPC owners are often holders of certain favorable rights, such as the ability to approve the design scheme of a neighboring school, or the option to purchase adjacent acreage. While these rights sometimes run with the land, if they are unrecorded and/or personal, they should be freely assignable to a bulk purchaser of the MPC without the consent of the grantor of the right.
The fewer consents required and sought for your sale, the more likely you are to proceed to closing without delays and without extractions sought by third parties who may otherwise try to hold a consent hostage.
4. Most-Favored Nation Provisions
One of the most restrictive provisions for a developer in a lot sales contract is a most-favored nation provision, or one that requires a developer to give one homebuilder the same favorable terms that are offered to any other homebuilder.
For obvious reasons, these provisions can alarm a potential buyer of an MPC, particularly as the market moves. Avoiding most-favored nation provisions is best. If that's not possible, we recommend:
(1.) limiting them in duration (e.g., for 1 year from the initial closing only);
(2.) limiting them in scope (e.g., for same-sized lots in the next section of the project only);
(3.) restricting them as much as possible to the type of favored term (e.g., base lot price and fees only); and
(4.) providing that the most-favored nations provision is waived if the homebuilder is late on a closing or defaults under the lot sales contract.
Another restrictive provision for a developer in a lot sales contract is a right of first offer or right of first refusal in favor of a homebuilder with respect to the purchase of lots in a future section of a project. While homebuilders request these provisions to ensure they get a critical mass of lots (and thus, maximize the benefits of building and staffing their model home and the other costs they incur by coming into the project), ROFOs/ROFRs restrict developers from bringing in new homebuilders, which is particularly problematic when there's an under-performing homebuilder.
As with most-favored nation provisions, ROFOs/ROFRs aren't desirable for MPC buyers so should be avoided if possible. Alternatively, we recommend limiting their scope and duration and/or providing that the right is waived in the event of a late closing or a builder default.
It isn't realistic to never give a builder a ROFO, or to always get a provision that a contract is assignable without the other party's consent. But negotiating certain provisions into your contracts – or avoiding them – as often as possible – will maximize the readiness of your MPC for the market when it comes time to sell.
At The Watson Firm, our lawyers have bought and sold MPCs at every stage of their life. Some of those projects include Connerton, Willowsford, The Groves, Belterra, Reston, Windward, and many others. Contact us if we can be of assistance in the creation, purchase, maintenance, or sale of your MPC.
About The Watson Firm
Founded in 2008, The Watson Firm provides legal services for master-planned, mixed-use and resort communities. Our industry experience, both on the business and the legal side, is what makes us uniquely capable of guiding clients through the myriad of legal issues involved with any new or ongoing development.
Monty Watson, the firm’s Founder and Managing Member, has been instrumental in the sale or purchase of more than 35 master-planned communities, and has created the legal infrastructure for some of the best-known communities in the country. Before founding The Watson Firm, he served as Chief Operating Officer of Rockpoint Finance, a real estate private equity fund; General Counsel of Terrabrook, one of the country's largest land developers; and as a lawyer in private, public and in-house practice. He can be reached at firstname.lastname@example.org.
About the Author:
Rachel Wilson represents developers in all phases of master-planned community development, from acquisition to disposition or turnover. Rachel's specialties include acquisitions, homebuilder contracts and construction loans, and she handles all other client needs, from CC&Rs and HOA formations, to construction and consulting agreements. She can be reached at email@example.com.