Equity on the call and a coupon in the term sheet

The vocabulary fight here is real and it isn't accidental. Calling it equity keeps it off the debt line and out of the senior lender's prohibited-indebtedness language. Calling it a coupon is how the investor thinks about getting paid. Both sides need their word to win in different documents.

I sat through a version of this last year at a much smaller scale. Twelve units. The gap was $180k and it still needed a real document. What killed it for me was the removal rights. If I miss distributions for two quarters the pref holder can take over management of the entity, and my name is on everything. I walked.

Nine months and they still want their floor. That's the whole game right there

@samantha_ruiz that removal language is the flag worth watching on the construction side too. A mid-project takeover is where things go sideways fastest, since a new party stepping in has no real way to know what is actually half finished. Nobody's remedy contemplates a building with open walls.

I understood maybe a third of this and I still read it twice. What does minimum multiple mean in plain words? Like 1.3 times whatever they put in, no matter how fast they get paid back?

@bmoreno23 yes, that's it. If they put in a million and the multiple is 1.3, they get 1.3 million total before the sponsor sees profit, whether that takes four years or nine months. The short payoff is where it stings.

The document worth asking for after that call is the LLC agreement rather than the term sheet. A term sheet says priority return. The operating agreement says what priority actually means when cash is short, who signs, who controls, and what happens to the sponsor's interest. A perfectly reasonable term sheet sitting on top of documents that aren't reasonable at all is a common enough finding to justify the request every time.

The silence when the sponsor asked about reporting is the part I'd have remembered too.

@tashaford30 did anyone say what happens if the senior lender objects? I thought most senior loans have language about additional capital in the borrower.

That point usually gets touched, @diane_kowalski, and briefly. The senior lender will want to review the structure and often requires the preferred position to sit at a level above the borrower entity. That changes what the pref holder can actually reach if things go wrong. Anyone on the structuring side should correct that if it is off.

@renee_dubois you are roughly right. Structuring it at the parent means the preferred holder's interest sits in the entity that owns the borrower, so remedies reach ownership of the borrower rather than the property itself. Senior lenders generally prefer that. It also puts the preferred investor one step further from the asset, and that distance is priced into the coupon.