Have seen a similar post recently regarding the process of securing LP equity for a joint venture acquisition.
Similarly, I wanted to describe a scenario and see what others thought would be an appropriate next step.
In contract on a deal, seller provided DD materials upfront and asked for hard dates in the contract (which amounted to a 35 day DD, 30 day close, plus a 30 day extension option with additional non refundable money).
We hired a broker to find us the LP equity. Discovered that the potential pool of LP money for the asset was shallower than we had thought. Had one group in particular that stepped up, however as we were approaching the end of our DD period, they hadn't given us a firm answer. We asked for a 2 week extension and received it. We used the two extra weeks to negotiate and finalize a term sheet. The LP wants time to do their standard DD process (we have completed ours and all the materials are available for their review) and also to negotiate and execute a binding JV agreement.
The seller has indicated zero interest in providing another extension. Can't say I blame them. Their stance is simply that our inability to line up equity faster is not their problem. There is not another buyer waiting in wings, but I believe the seller simply wants to stand their ground and there are some large egos involved.
That being said, the risk for my group is that if we go hard while LP is still doing their DD, and they somehow decide not to move forward, we are essentially fucked. Even if they wrap their DD before the expiration date, there is no chance we get a JV agreement fully negotiated in that short time frame.
Any thoughts? If you were in GP position, would you terminate contract? Are there any ways of potential protection (I have heard of cases where non binding term sheets were made binding for these exact scenarios)? Or, is this a normal type of scenario whereby the GP simply needs to step up, go hard, and then deal with the JV structure/debt financing after DD but prior to close of escrow?
Have you done any business with the LP before? Is putting together a JV agreement with them going to be a month long thing, or is it going to be 6 months because they suck to work with?
Generally speaking, I view this as a normal type of scenario for the GP where they need to step up, go hard with their deposits and figure it out later (as long as it isn't going to bankrupt them). I will admit that part of me saying that would definitely be my ego and not wanting to see one of my deals die because of a little thing like money, but on the other hand, taking a risk like that is also the reason why an LP is paying the GP a management fee/promote for a deal. Also, you have to think of the reputation risk of putting a deal under contract and not closing because you don't have your money lined up and it not being something property related.
First deal with this particular LP. They have been working hard on getting through our diligence quickly, but there is only so fast they could move. I imagine the JV agreement takes 4 weeks, but the reality is why would the seller want to extend our hard money date until after JV agreement is signed? The GP is basically balance sheet capital of CEO, I agree that the GP needs to have the balls to step on and go hard if they want to transact, trying to find a nice way of explaining this to the principals of my firm without pissing them off. The seller has already told us that we need a reality check and need to step up or piss off.
And yes, reputation risk......
Yea, your seller doesn't care at this point about what is going on between you and the LP because it isn't property related.
I think you explained the situation well here - just say something similar to your principals and ask if they will warehouse the deal until LP can be fully lined up. I would be shocked if it was the first time in their history that LP capital wasn't perfectly synced at the time of closing and they hadn't done something similar before.
Good luck and let us know how it turns out.
LP is simply a form of financing... It's up to the GP to now decide if they are comfortable going hard. You have to treat this like you've switched lenders midstream.
This must be a decent size deal to get that amount of DD with no hard money yet. Everything 10mil or less I'm seeing sellers want hard money day 1. No joke.
In the process of buying a smaller off market deal from a broker for our company. 4 million. ..we received 3/4 DD materials ahead of time. Submitted our offer. We didn't hear back from the seller for almost 2 weeks. His broker said it was due to personal reason. Ok whatever. They responded today. We agree on price but They want the Ernest money to go hard upon execution of the PSA. Even though we don't have all the DD materials up front. We usually have the 1st draft PSA done in 1-2 days so in so many words I told the broker to go f**k himself. Was I out of line?
Coming from the LP side, I would ask them where they stand with the information you have already provided to them. Don't be afraid to explain your situation and ask them: assuming you find nothing during your DD, will this deal pass your investment committee? Assuming they have already spent a bunch of time and visited the property, it sounds like they are going to go ahead with the deal unless something shakes our during DD (which if you are confident in your findings, you should take the risk).
Just curious - how much JV equity is this? Worst case scenario, is your group able/willing to syndicate the remaining equity?
So what if your firm doesn't have enough equity to close this transaction? How do startup real estate investment firms do it? Especially on the first deal. Do they make sure they have enough personal funds?
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