Private Equity in the Real Estate and Construction Industries

AuthorBy Benton T. Wheatley
THE CONSTRUCTION LAWYER26 Volume 42 Issue 2 2022
Private Equity in the Real Estate
Development and Construction
Benton T. Wheatley
As with many things in life,
the organizational structures
surrounding real estate develop-
ment continue to become more
complicated. The expansion
of private equity (PE) funding
into real estate developments
involving construction presents
a wealth of new opportunities
for stakeholders to structure
and nance their projects. At the same time, this expan-
sion also presents any number of “traps for the unwary”
construction lawyer. Some of these pitfalls may manifest
early, such as when the parties nd themselves disagreeing
about project pricing models, or later, such as when project
delays or defects lead to cost overruns. While the expan-
sion of private equity into construction is not a mandate
that we all become experts regarding the legal intersection
of private equity and construction, construction lawyers
should at least equip themselves with enough knowledge
to understand the nuances of this sort of project nancing
and to spot potential legal and client corporate conict
issues that could affect both the client’s and the lawyer’s
risk in undertaking the representation.
Noting there is nothing inherently wrong with business
activities that have their nexus at this intersection, con-
struction lawyers representing the various constituents
to projects with a private equity investment component
must step outside of their typical expertise to understand
the risks that may arise from these activities. This analysis
begins with understanding the full identity of the own-
ers of the entity that owns the project. To the extent there
is no potential for divergent nancial or legal interests
between the owner or owners of the project, then, in the
context of this article, there probably are not any lurking
legal or corporate conicts. However, if the project owner
is an entity that may have two or more owners and related
duciary duties, and those parties have nancial or legal
interests that could diverge at some point, there is signi-
cant potential for legal and corporate conicts that likely
are not immediately apparent to construction lawyers. In
this scenario, the potential for a construction lawyer to
be overtaken by events and wind up with signicant legal
conicts or duciary duty breaches, or to have committed
malpractice, is very real.
While not a case involving real estate development, the
Delaware Chancery Court’s statement in U.S. West, Inc. v.
Time Warner, Inc. clearly identies the potential for risk
when the “owner” of the thing at issue involves multi-
ple parties, such that the identity of the owners and their
individual nancial interests are not necessarily the same:
Increasingly, large scale business projects are under-
taken in legal forms that, through complex contracting,
allow for joint corporate investment and for specied allo
cation of managerial authority. Such forms offer evident
advantages: access to capital, to specialized knowledge
and relationships, and potentially to operating synergies.
But, because the participants in such joint venture proj-
ects often have important investments in related businesses
held outside the joint venture structure, the venturers will
not have identical incentives in all future situations. Such
differing incentives will in time lead to costly disputes
unless the contractual document establishing the venture
at the outset clearly resolve particular disputes in a way
the parties accept later, when these differences arise.1
When the development and execution of a construction
project involve a project owner entity with two or more
owners, as when there is a PE investment component pres-
ent, a construction lawyer should understand potential
issues well enough to spot risk—or opportunity—for the
client, depending on the client’s position in the project
hierarchy, to allow that lawyer to properly identify who
the client is and is not, and to counsel that client directly
or refer the client to counsel with the appropriate exper-
tise. As noted in U.S. West, clever transactional lawyers
do a good job of creating deal structures that take advan-
tage of the benets of the different legal entity forms but
rarely have a true understanding of how, on the design
and construction side of the deal, project delivery models
might affect the various legal rights and responsibilities
of project stakeholders. For example, the use of a con-
struction manager at risk contract form that provides for
project pricing on a costplusafee basis with a guaranteed
maximum price can result in signicant issues when a
passive PE investment is part of project nancing. While
construction lawyers typically do not spend a signicant
amount of time pondering the implications of the legal
forms chosen to prosecute a development and construc-
tion project, it is becoming more critical that they look up
from their construction law “silo” in order to understand
the big-picture implications of providing legal advice in
the context of complex project nancing structures.
Benton T. Wheat ley

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