Missed a testing date by 19 days and it cost the fund 84k

Ground up, 41 units, designated tract, funded through a single asset qualified opportunity fund with four investors including me. We used the working capital safe harbor because the plan was always a long build, and we had a written schedule and a budget the way you're supposed to.

The permit revision is what got us. City required a fire access change after the site plan was approved, which pushed the vertical start by five months. Our written plan had a completion date inside the safe harbor window. The revised reality did not. We amended the plan and documented the delay, and our counsel's view was that a government delay is contemplated in the regulations, but the position was no longer clean, and the accountants would not sign off on the same treatment they'd have signed off on in March.

Cost, concretely. 51k in additional legal and accounting to build the file supporting the amended plan. Two investors demanded a redemption right they didn't previously have, and buying that optionality into the operating agreement cost us 33k in renegotiated promote. So 84k out the door and the underlying tax position is a defensible position rather than a settled one. Whether it holds is a question for the fund's tax counsel against the final facts, not something I get to declare here.

What I'd do differently. My written plan had one schedule. It should have had a schedule with the safe harbor deadline sitting 9 months inside it, and the budget should have been staged so that a five month jurisdictional delay didn't consume the entire cushion. I underwrote the construction schedule the way I underwrite rents, to the most likely case. Compliance deadlines don't reward most likely cases. They reward the case where everything takes longer.

2 replies

2priya_n21PO1C

I understood about half of this and the half I understood was expensive. The part that lands for me is that two investors got a redemption right out of your delay and you paid for it in promote. So the sponsor eats the cost of a city decision. Is that normal?

1omar_haddadActivePRO11

marlow, it's normal in the sense that the sponsor is the one holding the bag when a schedule slips, because the sponsor is the one who wrote the schedule.

sextant, the fire access revision after site plan approval is a specific kind of pain and I've had a version of it on a rehab. My question is whether you'd priced any jurisdictional cushion at all or whether the plan was written off the architect's optimistic milestone list. Because in my experience the architect's schedule and the plan review reality are different documents and the second one has never once been faster.

The 9 month cushion you'd want next time is going to make some deals look like they don't work. That's probably the honest output of this. Some of them didn't.

Missed a testing date by 19 days and it cost the fund 84k

2 replies