A case study in lending to a sponsor's GP entity for their co-invest, and losing most of it
Consider a lender who takes the lending side of a syndication rather than owning directly. A sponsor with a 96-unit under contract has all LP money committed but is short on personal co-invest, and asks for $120k as a short-term note at 12 percent, interest only, balloon at 24 months. The sponsor has been transparent throughout, and the lender agrees within about a week. What's actually purchased in a structure like this is an unsecured note to the GP LLC, not the property and not the borrowing entity. The GP LLC's only asset is its own membership interest in the deal, and without a pledge of that interest, a UCC filing, or a personal guaranty, the lender has no real security. If a request for a pledge is refused, that refusal is itself informative. When the deal hits a bad renewal cycle plus a floating rate that resets twice, and the sponsor runs a rescue round where new money comes in senior to existing equity, the GP's interest, the thing standing behind the note, gets pushed down the stack. Interest payments stop, and after a lengthy negotiation the lender settles for a fraction of the remaining balance and releases the note. The recovery: roughly $31k back on $120k, after $19k of interest had already been received. The lesson: take a pledge of the membership interest, have it properly papered by an attorney, and underwrite the underlying deal directly rather than the sponsor's account of it. Lending based on comfort in a conversation rather than an independent model of the actual units is a common and avoidable mistake. Comfort isn't collateral.
