Private Equity in the Real Estate and Construction Industries

• Author: By Benton T. Wheatley
• Pages: 26-39

THE CONSTRUCTION LAWYER26 Volume 42 Issue 2 2022

PRIVATE EQUITY

Private Equity in the Real Estate

Development and Construction

IIndustires

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