Put 50k into an RAL joint venture, got 21k back. Here's where it broke.

The break is in month eight, not month twenty.

In most states an assisted living or residential care license is issued to a named operator for a named address, and it isn't an asset the real estate LLC can own or assign, so when the operating partner left, the approval left with them and the real estate entity was back at zero with a converted house it couldn't legally fill. Exactly how that works differs state to state and some states allow a provisional license during a transition, which is a question for a healthcare attorney in that state. What the structure needed was either the real estate entity as a co-applicant where the state permits it, or a written standby operator with a signed management agreement, so that a departure meant a re-filing with a known replacement instead of a restart.

The reserve is the second half of it and it's downstream of the first. A reserve sized to a 90 day approval isn't a reserve, it's a bet on the agency's queue, and agency queues in high demand metros have been long precisely because everyone read the same demographic story you did. If I were reading a deck for one of these now, the two documents I'd want are the licensing application timeline the sponsor is assuming, in writing with a source, and the standby operator agreement. If the second one doesn't exist, the capital call in month fourteen is already scheduled, it just doesn't have a date yet.

I read paper and understand maybe half of what I read, and even I'd have caught this one if I'd known to ask whose name was on the application.

I'd put more weight on the eleven months than vellum does. Any deal that has to carry two mortgages through an approval process with no revenue is a carry problem first. You could have had a perfect standby operator agreement and still bled out over eleven empty months. The fix is the reserve, and reserves for licensing deals should be sized to the worst approval timeline anybody in that state has seen, not the median.

@flint both are true and they multiply. Eleven months of carry is survivable if the reserve covers it. Losing the license holder is survivable if there's a replacement. Neither one alone kills you and together they do, which is usually how these go.

I passed on something shaped like this about a year ago and the reason was small. I asked the sponsor how many licenses their operating partner currently held and they said this would be the first. That was enough for me. juniper, was that the case here?

The part I'd hold onto is that the real estate did its job. Both houses sold, they'd appreciated, and the loan got paid. What lost the money was the operating business wrapped around them, plus the conversion spend that a residential buyer wouldn't pay for.

Which is the argument for owning the dirt and the building and letting someone with a license and a track record take the operating risk, at a rent you can live with. Lower ceiling. The floor is a house.

One detail worth pulling out for anyone reading this later. Ask what the sponsor and the manager get paid during a pre-revenue period. Acquisition fees, construction management fees and asset management fees on committed capital keep running while the building sits empty, and in a lot of these agreements the manager is being paid through the exact stretch where the investors are being asked for more money. That's not misconduct by itself, it's the deal you signed. It does change how you read a capital call.

juniper, thanks for posting the actual months. The month eight to month nineteen gap is the number people should be copying out of this thread.