Happening NowFund Management

My fund manager used park-owned homes as collateral and I didn't read that part of the LPA closely enough

I'm an LP in three mobile home park funds, one of them performing well, two of them I'd rather not talk about. The one that taught me the most was a fund out of Texas that closed at $22M in 2021 and deployed into eight parks across Oklahoma and Arkansas. The deck said value-add, mostly infill repositioning, and I read the strategy section carefully. I did not read the collateral and security provisions with the same attention. Somewhere in the LPA the manager had the right to pledge park-owned homes, not just the land, as additional collateral on the senior debt. When rates moved and the lender on one of the Oklahoma parks got nervous in early 2023, they called for additional security and the manager handed over titles to 34 homes that were supposed to be generating lot conversion income. That income evaporated. The conversion thesis on that park is basically shelved now. My position in the fund is currently returning something like 0.6x on paper with two years left in the hold period. I don't think I'm getting to 1x. The lesson for me wasn't about the manager, who I still think is competent, it was that I treated the LPA like a disclosure document instead of an operating manual. The specific mechanics of what the sponsor can do under financial stress are buried in sections I assumed were boilerplate. They are not boilerplate.

stefan_novakPU4BPRO21

3 replies

The collateral provision thing is real and I caught a version of it in my second duplex deal, smaller scale obviously, but the same instinct, I skimmed the security section because I assumed it was standard lender language. It was not. My manager flagged it before I signed and walked me through what the lender could reach in a default scenario. That conversation probably saved me from a similar blindspot. The income-generating asset being pledged as collateral while simultaneously being underwritten as the return driver, that's not a contradiction the deck is going to advertise, and you're right that it's not boilerplate, it's the actual operating logic of the deal under stress.

The thing I keep wondering when I read your situation, and you may have already worked through this: did the fund documents give LPs any notice rights or consent thresholds before the manager could pledge the homes, or was it a unilateral GP decision once the stress trigger was met? Because those are two very different documents even if the collateral provision reads the same on the surface. One of them gives you something to negotiate with or escalate around, the other means the decision was already made before you knew the lender was nervous. That distinction matters for how you think about the two remaining years and whether there's any path to LP coordination if the situation deteriorates further.

ade_olawalePP4BPRO11

34 homes is a brutal number to lose income on all at once.

marcus_hale41CG4A

The word "additional" cost me fourteen months of lot-rent runway on two pads in Gadsden, Alabama, 2019.

Manager pledged 11 homes mid-conversion, lender took two outright when we missed a Q3 covenant, exit closed ugly.

I read "additional collateral" as protective language, not as a literal menu he could pull from under stress.

zainab_hAP4CPRO17

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