Read the whole LP agreement and still went from 4.2 percent to 1.9

I'll disagree with your own diagnosis. The cap expiry cost you $750k a year of debt service, which is real, but the deal died on the entry.

$34M for $2.55M of eventual NOI is a 7.5 cap on the number they actually achieved. Against $24.5M of debt that's a 72 percent loan on a 890-lot value-add with lot rents 29 percent below your own market case. You were 6.4 percent equity thick per turn of value. A 25 percent miss on the NOI ramp wipes that out arithmetically, cap or no cap.

And look at the in-place at entry. $295 average over 890 lots is $3.15M of gross lot revenue, so at a 40 percent expense ratio you had maybe $1.9M going in against $1.6M of capped debt service. 1.19 coverage on floating debt at close. That's the number that should have stopped you, before you got to any clause.

The consent right you're now asking for would have preserved your percentage of a deal that still doesn't clear the new preferred. Better protection, same outcome. The protection you needed was a lower purchase price.

@ledger's arithmetic is right about the entry and @warrant's point about the cap is right about the timing, and both are downstream of one assumption: that a 24 month operational plan can be executed under a 36 month loan with 24 months of rate protection.

That structure only works if the plan runs on schedule. Manufactured housing value-add plans have a specific reason to slip. The lever is lot rent, and pushing lot rent 40 percent on residents who cannot move without spending thousands of dollars draws attention from local government, resident organizations, and press. Rent regulation for manufactured housing communities exists in some jurisdictions and is under active discussion in others, and the rules vary by state and city, so the same portfolio can have two parks where increases run freely and two where they do not. A sponsor who models uniform increases across a multi-state portfolio has embedded a regulatory assumption without naming it.

On the structural point. Preferred equity admitted senior to existing common is the standard rescue mechanism when a bridge lender demands a paydown, and "to cure or avoid a default" language is drafted broadly on purpose. Whether that clause was properly exercised in this instance is a question for counsel reviewing those documents, and it is worth someone reviewing them rather than assuming.

The underwriting discipline that follows from this: derive the required exit NOI from the takeout lender's debt yield test, then ask what lot rent and occupancy that implies, then ask whether every jurisdiction in the portfolio permits it. That is a shorter chain of reasoning than a 20-tab model and it fails loudly when the plan is too tight.

1.9 percent of the common behind $9M isn't nothing if the hold gets extended long enough. 890 lots that can't be replaced anywhere is a real asset and the new preferred at 14 with a 1.4 multiple has every reason to want time rather than a fire sale.

What I'd ask the sponsor now is whether the preferred has a forced sale right and when it triggers. That date is the only thing that determines whether your 1.9 percent is worth anything, and you may as well know it.

The thing I'm taking from this is that reading the documents and understanding what the documents permit in a bad month are two different skills. You did the first one.

@warrant, when you asked for the preemptive right in hindsight, would you actually have had the $30k or whatever your pro rata of the $6M was, on a few weeks notice? Because the LPs I've talked to who had participation rights mostly couldn't fund them, and the right without reserved cash behind it just gets you a front row seat.

@sable that's the practical version and it's why I now read the rescue capital language before I read the business plan.

The clauses I look for, in order. Whether the GP can admit senior capital without consent, and how the triggering condition is worded. Whether existing LPs get a participation right and how many days they have to fund. Whether failure to fund carries a punitive conversion or just dilution. And whether the GP or its affiliates can be the provider of the rescue capital, because a sponsor writing itself a 14 percent preferred with a 1.4 multiple ahead of the LPs is a conflict that some documents permit explicitly.

@warrant, was the $6M from a third party or an affiliate? That changes what the loss actually was.