Case Study

JBG Opportunity Fund I, LLC (the Fund) was formed in 2005. Investors contributed $4.6 million in exchange for Class A Units (with the principals of JBG contributing $230,000 of this amount). The LLC Agreement for the Fund provides that distributions will be made in the following priority on the disposition of each asset (i) first, to provide each Class A Unitholder with a preferred return of 10% per annum on the invested capital allocated to the asset, (ii) next, to the Class A Unitholders to return the invested capital allocated to the asset and (iii) thereafter, 80% to the Class A Unitholders and 20% to the Manager. The LLC Agreement also contains a clawback provision which requires JBG to return any over distribution, net of taxes, at the termination of the Fund.

The Fund incurred $61,600 in organizational expenses and applied the remaining funds to acquire the following properties in 2005:

Property	Purchase Price
5630 Fishers Lane	$3,628,800
5640 Fishers Lane	$1,783,700
12411 Parklawn	$2,869,000
12420 Parklawn	$5,491,800
12501 Washington	$1,354,700
Total	$15,128,000

In connection with the acquisition, the Fund borrowed $10,589,600 with each property subject to a separate mortgage and loan agreement.[1] The amount of each loan is equal to 70% of the purchase price. (Rent generated by the properties and operating expenses are as set forth in the case study.)

In 2007, the Fund sold 5630 Fishers Lane for $4,173,120 and sold 5640 Fishers Lane for $1,962,070. The Fund distributed the net proceeds after payment of the mortgage loan amounts of $2,540,160 and $1,248,590 respectively.

In 2008, several tenants went out of business and rental income on the 12420 Parklawn was insufficient to fund both operating income and debt service. The rental income on the other properties was barely sufficient to cover operating income and debt service. In February 2009, the loan on 12420 Parklawn went into default. Shortly after event of default, the lender sold the loans on all three properties to Zell Vulture Fund IX, LLC (Zell).

After the filing of a foreclosure action in January 2010, Zell has sent over the following offer:

1. Zell will contribute cash to a newly formed LLC in exchange for Class A Units. The Fund will contribute their interests in the properties to this newly formed LLC in exchange for Class B Units. The cash to be contributed to Zell will equal to the net value of the property contributed.
2. The funds contributed by Zell will be used to pay down the existing loan. The remaining amount owed will be refinanced with a third party loan of $4.1 million. The remaining amount owed under the original loan will be converted into a mezz. loan owned to Zell.
3. Zell will be entitled to an asset management fee equal to 2% of gross rents, a loan financing fee equal to 5% of the $4.1 million loan and any refinancing thereof which is payable on the 2^nd anniversary of the loan and a disposition fee of 10% of the gross sale price on each property sold.

Question 1

Prepare an analysis of the proposal from the investors perspective. In this analysis, include a calculation of the after-tax proceeds received to date, discuss clawback issues and outline the tax consequences to the investors that would arise if the proposal is rejected. Also include an analysis of the tax consequences that would arise on the contribution by the Fund described in the Zell proposal.

Question 2

Prepare an analysis of the proposal from JBGs perspective. Include a discussion of the potential clawback issues that would arise if the roll-up occurred and if the proposal is rejected. Also, include an analysis of the tax consequences to JBG if the proposed structure was adopted.

Question 3

Prepare an analysis of the structure you would propose for JBG and the investors if the Zell proposal is adopted.

[1] Assume an interest rate of 6% and that the loan is interest only for 7 years. Also, assume that the loans are cross-collateralized and cross-defaulted.