Syndication

When things go wrong

The part of syndication people actually remember. What happens when the deal misses, the capital call comes, the property is worth less than you paid, and the investor and sponsor discover what the documents really said.

Every other section of this pillar is about building the deal right. This one is about what happens when it goes wrong anyway, which, over enough deals and enough years, it eventually does. Markets turn, projections miss, a capital call arrives, a property is worth less than it cost, an investor and a sponsor end up on opposite sides of a document they both signed. This is the part of syndication people remember, and it is where the terms written calmly at the start get read for the first time under pressure.

Trouble does not create the terms that govern it. It reveals the ones that were there all along.

The theme that runs through this section is that a bad outcome is not the same as a wrong done, and the operating agreement drew that line long before the trouble arrived. A deal can lose money without anyone breaching anything. A sponsor can make a genuine mistake that the liability standard protects, or cross into the conduct that it does not. An investor can be furious and still have no remedy, or can have a real claim and not know it. Reading these situations correctly, from either chair, means separating the disappointment from the actionable, and that separation was set by clauses covered back in the risk and operating sections.

The articles below work through the specific failures in order of how they unfold: the deal missing its numbers, the capital call that follows, the operational problems of a bad tenant or manager or contractor, the interest-rate trap, the refinance that does not happen, the property worth less than the purchase price, the investors who become the problem, the gradient from mistake to fraud, and what a limited partner can actually do when a sponsor goes bad.

Start with the first crack that usually appears: the deal missing its projections.

Inside this hub

The deal misses its projections

A missed projection is not a breach, and that is the first thing both chairs have to absorb. The question that matters is not whether the numbers came in low, but why, and whether the miss was disclosed as possible before the money went in.

The capital call: the conversation every sponsor dreads

A capital call asks investors to put more money into a deal that is, by definition, not going as planned. What the operating agreement lets the sponsor do, what happens to an investor who cannot fund, and why the terms were set long before the call.

Bad tenant, bad manager, bad contractor

The operational failures that sink real deals are rarely dramatic. They are a major tenant leaving, a property manager quietly underperforming, or a contractor blowing the budget, and the question is always whether the sponsor's response was reasonable, not whether the problem occurred.

The property is worth less than you paid

Negative equity is the quiet catastrophe of a leveraged deal, because the debt does not shrink when the value does. Who absorbs it, why the equity goes first, and how a sponsor's options narrow when the property is underwater.

The floating-rate trap

Floating-rate debt was cheap when it was taken and lethal when rates rose. Why the same loan that boosted returns at 3 percent quietly turned a performing deal into a capital call at 7, and how to read a deal's rate exposure before it matters.

The refinance that doesn't happen

Many deals were built on the assumption that a refinance would return capital on schedule. When the loan matures into higher rates and lower values, the new loan is smaller than the old one, and the gap has to come from somewhere.

When investors become the problem

Trouble does not always come from the deal. Sometimes it comes from the investors: the one who interferes, the one who sues, the faction that fractures. What a sponsor can do, what the operating agreement already decided, and where the sponsor's own conduct sets the limit.

Mistake, negligence, fraud, conflict: the gradient that decides everything

When a sponsor gets it wrong, the single most important question is which kind of wrong it was, because the operating agreement protects some of them completely and none of the others. The four points on the gradient, and where the line of liability sits.

What an LP can actually do when a sponsor goes bad

An investor who concludes the sponsor did real wrong still has to translate that into action, and the operating agreement has already narrowed the paths. The remedies that exist, the ones the document took away, and the order to try them in.

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Keep reading

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