A consent clause did not stop a rescue round dilution, and the reason is worth understanding

Every version of this story I've read starts in 2021 with a bridge loan and a rate cap. The document analysis is interesting but you'd have needed the same protective clause and a deal that didn't depend on a floating rate holding still. One of those two would've saved you and it wasn't the clause.

I've held things for eleven years that looked dull the whole way through and never once had a 20-day window to decide anything. That's the trade.

Worth pinning down the 1.5x preference in order of payment, because the two readings give very different results. Does the rescue money take $3.6M back on $2.4M before the original LPs see the first dollar, with the 15% accruing on top of that, or does the 15% count toward the 1.5x?

@raj_mehta14 usually the 1.5x is a floor and the accrual counts toward it, so whichever is greater at exit. Either way the original equity sits behind a big number. @dmitri_248 take a rescue call on a smaller deal, say 44 units, and here is the unpopular part. When the lender wants money in three weeks the alternatives are rescue capital at ugly terms or handing the keys back. Price it at 12 percent with a 1.25x and some investors will still call it stealing. The ones who wrote checks into the call end up made whole and the ones who did not are diluted, and there is not always a cleaner answer available on that clock. Where a sponsor is wrong, if they are, is the affiliate votes and taking units in lieu of fees without making that loud. That should be on page two of every offering.

The dilution was the symptom. The deal died in the underwriting file. 2021 bridge deals were routinely written with exit caps 25 to 50 bps below going in, rent growth over 6% for three straight years, and a cap that only had to work for the term of the initial loan. Take any one of those back to a neutral assumption and the equity doesn't clear. There's no papering a way out of an exit cap assumption. @dmitri_248, the question that would catch this in an hour: what happens to DSCR at a 7% all-in rate, and who funds the gap. If the answer is a rate cap that expires 24 months before the loan matures, that's the whole risk in one sentence and it has nothing to do with consent provisions.

What I now ask for before any LP wire, built mostly from stories like this one:

Cap table with every class, holder type, and voting weight. Names redacted is fine, affiliate vs third party is not optional.

Whether the GP is taking any compensation in units rather than cash.

The rate cap: strike, term, expiry date next to the loan maturity date, and who pays for the replacement.

A written answer to "what is the plan if the lender asks for a paydown in month 30." I don't need a good plan, I need to see whether they've thought about it.

The last two full-cycle deals with original projections beside actual results.

@dpatel_re is right that the underwriting mattered more, but @dmitri_248's version of the failure is the one people can actually check in advance. Bad assumptions look reasonable in a deck. A cap table doesn't argue back.

@marcus_hale41 that list is worth keeping. The part that's hard to judge from outside is what a normal answer to the paydown question even sounds like. If a sponsor says they'd fund a gap from reserves plus a member loan at 10%, is that a good answer or a rehearsed one? @dmitri_248, did anything in the reporting between month 20 and month 31 hint at it, or was the call the first sign?

I almost put money into something similar and passed for an unimpressive reason: the sponsor's quarterly reports came late twice and the second one didn't include the debt terms at all. Never got to the cap table.

A land syndication I did join has a clause that new capital can only come in on the same terms as existing capital unless 75 percent of unaffiliated members approve. That word unaffiliated is doing all the work and I only understand why after reading this.

@diane_kowalski unaffiliated is the word worth looking for going forward. @dmitri_248, the detail worth sitting with is the 20 days. Slow decisions are usually the whole method for a careful LP, and a structure that can force a wire decision in under three weeks is a structure that's hard to participate in properly no matter how good the sponsor is. That's not a criticism of any one sponsor, it's a reminder to ask what the shortest fuse in the document is before evaluating the returns.