Funded $48k of nonrefundable deposit before the operating agreement was signed. Deal died in diligence and so did the money

I've been building a list for two years and I finally moved on a deal that wasn't mine. Operator with a decent track record in flex industrial, 34,000 square feet in a tertiary market, $2.9m contract, planned equity $840k with me at $700k of it.

The sequence that cost me. Contract had a 30 day diligence period with $48k going hard at expiration. Operator's counsel and mine were on draft four of the JV operating agreement, arguing about a promote crystallization on refinance and whether my consent right on additional debt covered a supplemental loan. Day 28 arrives. Operator says he can't fund the $48k himself and the seller won't extend. He asks me to wire it as a deposit against my future capital contribution, documented by a two paragraph side letter saying it would be credited to my capital account on closing and returned if the deal died for seller default.

I wired it. Read the letter carefully and it did what it said, and what it said was that I ate the money if the deal died for anything other than seller default.

Deal died on day 51. Environmental phase two came back with a solvent plume from a former tenant use, remediation quoted between $310k and $600k depending on whose scope you believed. Seller wouldn't credit more than $150k. Right decision to walk. My $48k was already hard and gone, plus $19k of legal and $11k of my share of third party reports. $78k for a deal I never closed and a JV agreement that never got signed.

What I'd do differently. I'd have made the phase one review a condition of the deposit going hard, and on a flex industrial building with a tenant history nobody could fully account for, the phase two should have been ordered on day 3 rather than day 22. I'd also not fund a hard deposit while the operating agreement is still in redline. The side letter is what let me convince myself that was fine. The document was correctly drafted and the position was still wrong, because I took deal risk with none of the governance I was still negotiating for.

The part I'm honestly unsure about is whether a better structure existed at all. The operator had no money for the deposit. Either the capital provider funds it at risk or the deal doesn't get tied up.

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2luis_carrera Get yours

A structure existed. The deposit goes hard on a schedule, and the schedule is tied to diligence milestones instead of a single date. I've seen contracts where $10k goes hard at day 15, the balance at day 30, and the balance is conditioned on delivery of an acceptable phase one. Whether a seller accepts that is a different question and on a building with a solvent history that seller probably wouldn't have.

The piece I'd argue with is your framing of the operator having no money. He had no money for the deposit and he was still asking for a promote. If a partner can't fund $48k of the risk on a $2.9m contract, that's diligence output about the operator, and it arrived on day 28 when your leverage to reprice was gone. I'd want that answered on day 1 by asking what he's funding and where it is right now.

The $19k of legal spent arguing about promote crystallization on a refinance for a building nobody had environmental clearance on is the line I'd change first. Sequence the cheap fatal diligence ahead of the expensive structural negotiation. Phase two on a former solvent user costs a few thousand and it decides everything, and you paid your lawyer to redline a waterfall for a deal that was already dead in the soil.

Funded $48k of nonrefundable deposit before the operating agreement was signed. Deal died in diligence and so did the money

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