My repeat borrowers want to put money into the deals, not just the notes

The familiarity cuts both ways and I've lived it. I had a borrower come in on the equity side after two years of lending to me on single-family stuff in the Midwest, and the first six months were fine, genuinely fine, but by month eight he was asking questions that a pure LP would never think to ask. Stuff like why I took a slightly higher LTC on one acquisition versus what I'd done on a deal he'd funded two years prior. He wasn't being hostile, he just had context. And that context meant I had to be more precise in my updates than I'd ever been with outside capital, because he'd call out a vague sentence where a normal LP would just nod.

What I'd push back on is the framing that his knowledge of your underwriting is the risk. That's actually the part that tends to go fine. The harder thing is that he has no frame for what equity volatility feels like. He's been on the debt side, getting paid, protected by the asset, sleeping fine. Equity is a different animal and borrowers-turned-LPs sometimes hit their first cash flow delay or a longer-than-expected hold and it lands harder than it would for someone who came in already expecting that ride. I've seen it shake a relationship that was rock solid for years. Not because anyone did anything wrong, just because the expectations were built on a totally different product. I'd have that conversation explicitly before you paper anything.