A GP who also holds the senior note is not a conflict anyone agreed to on page one
A deal worth sitting with: a 48-unit value-add, GP raises LP equity at the typical terms, 8 percent preferred return, 70/30 split above that. Eighteen months in, the bridge lender calls the loan. The GP steps in with a fund they control separately and originates a replacement note at 10.5 percent, interest only, secured by a first lien on the same asset the LPs are in. The preferred return clock kept running on the equity side. The asset management fee kept accruing. And the GP entity was now collecting a spread on the debt while also controlling the foreclosure trigger. No LP consented to that structure because the PPM never contemplated it. The operating agreement had a conflicts provision that required approval for transactions between the GP and the partnership, but the GP's counsel argued the lending fund was a separate legal entity and the provision did not reach it. That argument is not obviously wrong, which is the problem. The GP now sits at the top of the capital stack and the bottom, controls the clock on default, and earns whether the equity wins or not. The LPs' only real protection at that point is whether the note terms were arm's length, and arm's length is genuinely hard to prove when the same person negotiated both sides. The thing that made this difficult to catch on the way in is that nothing in the original documents prohibited it outright. The conflict provision covered related-party transactions with the partnership entity, not related-party transactions with the underlying real estate used as collateral. That gap is worth closing in the operating agreement before it becomes relevant, because once the rescue capital is in and the lien is recorded, the leverage is gone. What does your current operating agreement actually say about a GP-affiliated entity taking a secured position on the property, and does it define affiliated broadly enough to reach a fund the GP is a managing member of?
