Steel and sitework overran 19%, so distributions stopped for six quarters

Went through this twice and the vocabulary is still tripping me up. What's a sleeve? And a capital call means they can ask for more money after you already wired the $200k?

@marlow when they paused distributions, did the LPA actually let them, or did they just do it and tell you after? I'm asking because a friend got the second version and it turned into a very long email chain.

I looked at something shaped almost exactly like this in late 2022 and passed for a dumb reason, I couldn't get a straight answer on who signed the contractor agreement. Felt like I was being annoying at the time. @harrow's point about permit timing is the thing I'd have missed entirely.

The absorption number is where I'd spend my energy. 3.5% of net rentable per month to 90% is an aggressive but not crazy assumption for infill storage in a market with household movement. It's a fantasy in a market where existing homeowners aren't moving, because the life events that fill storage in year one are moves.

What compounds it is that you're filling into a declining street rate. If your pro forma had a $1.15 per foot street rate and you're discounting to $0.92 to hit occupancy, you don't just get there later, you get there at a lower revenue plateau, and the exit cap gets applied to that plateau. A 20% revenue miss at a 6.25% cap on a $4M asset is real money against your basis.

@marlow did the GP publish a same-store or same-asset street rate series during lease-up, or just occupancy? Occupancy alone during lease-up tells you almost nothing, an operator can buy occupancy with a $1 first month and free lock. I'd want the rate series and the discount percentage side by side, monthly.

Mechanically, how does pausing distributions work? Is the money you were supposed to get just gone, or does it accrue somewhere as owed to you? I've read "preferred return accrues" in a couple of decks and I don't know whether that's meaningful or decorative.

@sable it depends entirely on the document, which is the unsatisfying answer, but the two shapes are cumulative and non-cumulative. Cumulative means unpaid pref piles up and has to be cleared before the GP gets promote. Non-cumulative means the quarter passes and it's gone. I only learned the difference because someone here made me go find the word in a doc I'd already signed.

@sable it accrues if the LPA says it accrues, and the sentence you want is usually in the distributions article, not the definitions.

@marlow the clause I'd go looking for in yours is whatever permits fund-level cash to cover asset-level shortfalls. Some funds ring-fence development assets so a shortfall there hits only that asset's reserve and then the GP has to choose between a call, rescue capital, or handing keys back. Yours plainly doesn't ring-fence. That's a design choice the GP made and disclosed somewhere, probably in one sentence you and I both skimmed.

The other document worth pulling is the fund's borrowing base or facility agreement if they have one. If stabilized assets are pledged to the same lender group financing lease-up, the paused distribution wasn't really a discretionary decision by the GP at all, it was a covenant. Different problem, different conversation to have with them.

The interest reserve exhaustion is the piece I'd chase from the debt side. On construction and bridge paper, the reserve is usually sized off the lender's own absorption view with a haircut, and when it runs out you're into an extension test with a debt yield or a debt service coverage hurdle. Failing the test is what triggers cash sweeps and fresh equity requirements, and the sweep is often what really stops distributions.

Terms vary a lot by lender and by vintage, so anything specific you've been told about extension conditions should get confirmed in writing with the actual lender rather than taken from the GP's summary. Ask the GP for the extension section itself.

@marlow do you know whether they had a rate cap, and whether the cap cost got charged to the fund on extension? That's the line item that surprises people the most.

I'd read one more page before I decided how bad this is. In most of these documents there's a clause that says an overrun above some threshold, often 10% of budget, is a "cost overrun event," and it names who funds it. Sometimes it's the GP out of its own pocket up to a cap, sometimes it's the LPs pro rata, sometimes it's a mandatory GP loan to the fund at a stated rate that sits ahead of your pref. That last version is the one that costs you the most without ever looking like it (I've seen it written as a 12% GP loan with accrued interest payable before any LP distribution).

@marlow if your call was pro rata to LPs, then either the GP had no first-dollar obligation or it had one and waived it with LP advisory committee consent. Worth knowing which, because the second one means somebody voted for this on your behalf.

And on @harrow's point, the strongest version of it is that a 5% contingency plus a 20-month interest reserve are the same assumption written twice. Both are betting on the schedule. One document, one bet, two line items. You want them independent.