My vote never reached the master fund through two layers of promote

The 50 cents on the dollar dilution rate is the whole loss. Everything else is friction you could have priced. That clause turned a cash flow problem on your end into a permanent transfer of ownership to the manager, and he was the only person who knew whether to fund the call.

Genuinely asking, what's a feeder? I thought all syndications were one entity that owns the building.

@rigging a feeder or SPV is a second partnership that sits between you and the deal. You own units in it, it owns an LP interest in the deal partnership. Common when someone with a following raises $2 million from small investors to fill one large LP slot the sponsor won't split up.

Two sets of docs, two sets of fees, and a person in the middle who decides for you. I don't understand why anyone signs the second version when the first exists.

@verity because the first often isn't available at $25k or $50k. Sponsor wants a $500k minimum for that slot, feeder gets you in at 50. That access is real and it costs 1 and 10 plus admin, which some people will pay happily. The dilution mechanic is a separate question from whether the access is worth paying for.

$5,000 a year of admin on a vehicle that raised, what, $840,000? That's roughly 60 basis points a year for bookkeeping and K-1 prep on fourteen investors. Not outrageous by itself, but stacked on the 1% and the 10% it's a lot of drag on a deal that only did 1.25x.

I'm reading this twice like everything else. So the question to ask is whether the thing I'm buying owns the building or owns a piece of another partnership that owns the building. Is there a word for that on the paperwork I'd recognize?

@juniper look at the recitals on the first page of the operating agreement. If it says the company was formed to acquire and hold an interest in another named LLC or LP, you're in a feeder. If it says formed to acquire the real property at whatever description, you're in the deal entity.

I'll take the other side a bit. Co-GP and feeder structures aren't a scam and the disclosure here sounds like it was actually complete. @vellum read the SPV docs, skimmed the master docs, and couldn't fund a $9,000 call on a $60,000 position. The fee stack cost maybe two or three points a year. The dilution cost more, and the trigger was reserves, not structure.

@keystone the reserves point is fair. But a $9,000 call at a moment the manager chose, with a 50 cent conversion sitting there ready, is a clause designed to produce that outcome. I can hold both of those thoughts without dropping either.

Do sponsors even like these feeders? I'd think fourteen small investors behind one signature is a headache someone eventually pays for.

The clause I'd hunt for in a feeder is how the manager is required to vote the underlying interest. Three versions show up. Full discretion, which is what @vellum got. Pass-through, where the manager must poll members and vote the master interest in proportion to their responses. Or a threshold version, where discretion applies except for listed major decisions like a sale, refinance, or a capital call. Pass-through is administratively annoying and it's the one I'd want. Also read the dilution section as a formula and actually run it. "Valued at 50% of the contributed amount" sounds procedural until you multiply it by your unit count and see what percentage of the vehicle you just gave away.

So the practical version for someone like me is: if there's a middle entity, assume a capital call can arrive and hold cash for it. Is there a rule of thumb on how much?

@marlow I've seen people hold 10 to 20% of the committed amount aside for exactly this. No idea if that's the right number, it just seems to be the range people say out loud.

The 1.06x after 4.5 years while everyone above you got 1.25x is a brutal way to learn where you sat in the stack.

I'm at the stage of choosing between platforms and direct sponsor relationships, and I hadn't understood that some platform offerings are structurally this. @vellum did the offering materials describe it as a feeder anywhere in the marketing, or only in the docs?

Reading the documents, the master's capital call in year three is the interesting signal. Deals call capital when a lender wants a paydown, a rate cap needs replacing, or reserves ran dry. If the SPV manager knew which of those it was, he had better information than his own members when he set the funding window.

I read a feeder operating agreement last year with almost this exact stack and I passed on it for the voting clause alone.

The thing I'd add to @warrant's list is information rights. In that document, members were entitled to the SPV's annual K-1 and whatever reports the manager chose to forward. There was no right to receive the master's quarterly reports, the rent roll, or the lender correspondence. So the manager's discretion to vote sat on top of an information gap he controlled. That combination is what makes the dilution clause dangerous rather than just harsh, because you can't independently judge whether funding a call is a good idea.

@keystone, I agree the fees were disclosed and the reserves failure is real. Where I disagree is calling the structure incidental. A direct LP facing the same call has the master's reporting, the same lender letters as every other LP, and a dilution mechanic sitting in one document. @vellum had a manager between him and all of it. On a $60,000 check the fee drag was survivable. The information asymmetry wasn't.

One question for @vellum. Did the SPV agreement give the manager a right to fund the shortfall himself, or did it require an offer to the other members first? Those are different documents and the second one at least spreads the upside.

Reading this thread I've decided the question I ask any sponsor or syndicator first is now "what entity am I a member of and what does it own." Cheaper than the alternative.