There are two sentences in the documents that took my $50k to nothing

The part that jumps out is the sequencing. Your $6.5m gap showed up ten months in, which means it showed up after the construction lender had already funded into the job and had every reason to demand the equity gap get closed before the next draw. Once the lender is sitting on a half-built building, they hold the pen. The sponsor wasn't really choosing to dilute you, they were choosing between diluting you and defaulting on a draw request.

That doesn't make the clause fair. It does mean the clause was going to get used the moment the budget moved, and on a conversion the budget moves. I'd want to know what the loan agreement said about equity cure periods, because that is usually the clock that makes calls urgent.

@warrant asked the right question and I want the answer too. My guess from the shape of it is the affiliate came in as equity, because if it had been a member loan the sponsor wouldn't have needed to dilute anyone.

The other document I'd go find, @beacon, is the original sources and uses page and whatever contingency line it carried. On a conversion of that vintage I'd expect hard cost contingency north of 10 percent and a separate line for facade, because window openings on a sealed 1970s curtain wall are not a surprise, they're a known unknown that either got tested or didn't. If the budget carried 5 or 7 percent and no facade allowance, the $6.5m call was priced into the deal before you wired.

I don't say that to be harsh about your loss. I say it because you can read that page in fifteen minutes on the next one.

Run the numbers on what they told you and it's rough. $34m over 96 units is about $354k a unit all-in including acquisition. $41m is $427k. In most mid-size southeast downtowns, $427k a unit of cost against market rents is a hard sell unless the rents are genuinely high or there was an abatement doing work.

So either the original budget was thin or the exit assumption was thin. I'd bet on the original budget. @fathom is right that a curtain wall from that era is a testable question and it got answered by the contractor instead of by a consultant, which is the expensive order to answer it in.

The dilution clause is what cost you the money. The budget is what cost you the deal.

Can someone explain the 2x thing in plain terms? I read it three times and I think it means if the sponsor's affiliate puts in a dollar they get credited as if they put in two, and everything else shrinks around that. Is that right or is it more complicated.

@sable that's basically it. The participating money gets units issued at a discount, or gets credited with a multiple of what it contributed, and every existing percentage recalculates downward. You don't lose your money in the sense of it being taken. Your share of a bigger pie gets small enough that the pie stops mattering to you.

@beacon, I looked at two conversions in 2023 and passed on both, and the reason on the second one was that I asked for the feasibility report and got a summary memo instead. The sponsor said the full report was confidential to the lender. Maybe that was true. It made the whole thing unreadable for me, so I didn't go. I don't know if that was discipline or luck.

Naive question from the paper side. If the construction lender came out fine and the equity got crushed, would I have been better off trying to be in the debt somehow? Or is that not something a $50k check can do.

@vellum a $50k check generally can't be the construction lender on a $41m job. You'd be in a debt fund, which is a completely different set of questions, and on a conversion the senior lender got protected by structure that took lawyers months to build.

@beacon the four things I ask before wiring into anything with construction in it, in this order:

1. What is the total budget, what is the contingency percent, and who funds an overrun above contingency. If the answer to the third is "the LPs," then I know I'm underwriting a series of calls.
2. What is my dilution if I don't fund.
3. Has the sponsor completed a conversion, not a development, a conversion. Different trade risk entirely.
4. Who signed the guaranty on the loan and what is behind them.

You lost about $45k learning question 2. That's a real number and I don't want to pretend it isn't, but it's the cheap end of that lesson. I know people who learned it at $400k.

This is the question I would have been embarrassed to ask in a room. How does someone at @beacon's stage even know to ask about a dilution clause? I've read maybe two operating agreements and I understood roughly a third of each. Is the answer that you pay a lawyer to read it every time, or is there a shorter path?

@compass you pay someone the first three times and after that you know where to look. It's the same six or seven sections in a different order.

I want to push back on where this thread has landed though. @ledger and @fathom are treating this as a budget failure and @warrant is treating it as a document failure. Both are downstream. The upstream failure is that somebody underwrote 96 units into that building and the building did not support 96 units at the cost they carried.

When the window line has to be rebuilt, that isn't just a facade line item. It usually means the original unit plan assumed a glazing condition that doesn't exist, which means the plan gets redrawn, which moves the unit count or the unit mix or both. @beacon, do you know if the finished building has 96 units? I'd bet it has fewer. That's the number I'd chase, because unit count times achievable rent is the entire deal and everything else is arithmetic around it.

I hold land and I have made a rule out of not putting money into things I can't walk out and look at. That rule has cost me plenty of upside. It has also never cost me a capital call.

This thread is the most useful thing I've read in a month, and I'm at zero experience. The part that stuck is that the clause was two sentences and it was right there. So the skill isn't finding hidden things, it's reading the things that aren't hidden.

Near miss on my end, smaller. I was $25k into a soft commitment on a four story warehouse-to-loft deal, not office, and I asked the sponsor the @canton question about who funds overruns. He said "we'd expect the group to step up." That sentence is what got me out. He wasn't hiding anything either, he just answered honestly and I finally heard it.

@beacon, thanks for writing this while it's still uncomfortable. Most people wait until it's a funny story and by then the useful details are gone.