Equity Brokerage Agreements

If you are engaging a broker to procure equity investors in your real estate project, we highly recommend that you carefully review the brokerage agreement before signing. Broker’s initial draft agreement will likely have a broader reach that entitles the broker to more commissions than you are expecting. Below are concepts to be aware of.

Scope of Projects Covered

• Broker’s draft agreement may define the scope of engagement to cover more projects and potential projects than you intended.
  • For example, you intend to engage a broker to find an equity investor for a single project or a group of projects. However, the broker’s form agreement provides that broker is your exclusive broker for procuring equity investors on all your projects in the United States, including the specific project you intended.

Scope of Affiliates Bound

• Broker’s draft agreement will provide that the engagement covers your (broadly defined) affiliate entities, possibly all affiliates of your organization’s parent entity.
• It is reasonable for the broker to be protected from changes between related entities for the targeted project(s), but the breadth of some language we have seen in these agreements would result in more commissions claims than you likely intended.

Term and Extended Tail Periods

• Broker’s draft agreement may provide for both an initial term and a tail period extending well beyond the initial term during which broker could earn commissions on funds invested by:
  • Prospective investors that were identified (or merely solicited) during the initial term
  • Investors that committed to a deal during the initial term
• While the concept is fair, the draft agreement will generally be very broad with respect to:
  • The length of tail periods
  • Who qualified as a prospective investor (e.g., anyone to whom the broker sent an email)
  • The scope of affiliates of an actual or prospective investor that would trigger a commission

Fees and Reimbursements

• The commission formulas need to be reviewed carefully; some are complicated and dense.
• Consider whether tail period commissions should earn the same rate of commission as the projects in the initial term.
• Consider excluding future deals on which another third-party broker also earns a commission.
• Be careful of cost reimbursements. We have seen draft agreements contain a range between zero cost reimbursement to uncapped cost reimbursement.

Funding Subject to Commission

• Broker’s draft agreement will likely provide that Broker earns a commission on all funding types, including equity, preferred equity, mezzanine financing and financing, and a sale of the project in lieu of an equity investment.
• Consider whether that scope is appropriate and whether the commission rate should be the same for all types of funding.

Exclusions

• Broker’s draft agreement will probably not exclude any existing investment partners or projects from the scope of the arrangement.
• Consider whether you need to add any appropriate exclusions.

Other Brokerage Rights

• Broker’s draft agreement may grant the broker the right to provide additional brokerage services.
• For example, we have seen draft equity brokerage agreements provide that the broker would have exclusive rights to be the listing agent for the future sale of a project.

In summary, equity brokerage agreements can contain broad and complex provisions that may entitle the broker to more commissions and rights than you initially anticipated. It is crucial to carefully review the scope of projects and affiliates covered, the length of any tail periods, the commission formulas, reimbursement terms, and the types of funding subject to commission. Additionally, consider whether exclusions or limitations are appropriate to protect your interests.

Please contact me if you would like assistance with equity brokerage agreements.