An LP check into a medical office deal can go wrong even when the private placement memorandum reads clean
For anyone new to limited partner positions: an LP gives a sponsor money, the sponsor buys and runs the building, the LP gets a share of cash flow and no control. Take a 38,000 square foot medical outpatient building leased 82 percent to one multi-specialty physician group, six years of term remaining, marketed to investors as defensive income. Reading the private placement memorandum, the PPM, carefully is standard practice. The mistake many investors make is not reading the underlying lease itself, even when it sits in the data room the whole time. A lease permitting assignment to an acquiring entity without landlord consent is a meaningful risk that a PPM summary can understate. If the physician group is acquired by a larger system, and the system later gives notice it will consolidate into its own campus at lease expiration, the credit story changes even though rent never stops being paid. Loan documents that require cash to sit in a controlled account once occupancy projections fall below a threshold can halt distributions entirely, and a capital call can follow, where partners who don't contribute their share see their ownership percentage shrink. A building sold in year three under those conditions can return meaningfully less than what partners put in, even though the tenant never missed a rent payment and nothing technically defaulted. The building simply went from one tenant with credit to one tenant with somewhere better to be. The practical fix: read the actual leases, especially consent to assignment, renewal options and termination rights, before reading the sponsor's summary of them, and ask in writing what happens to distributions if the lender starts sweeping cash.
