Sponsor Buying Out JV Partner After Buyer Couldn't Close—LP Opportunity or Red Flag?

Question

Hey all – first post here.

I've been an active operator and developer for about a decade, but lately I’ve been selectively investing as an LP. As part of that, I’ve been underwriting a lot of deals from other sponsors, and one recently caught my attention in a way that felt worth sharing and getting some feedback on.

It’s a recapitalization of a 180-unit stabilized portfolio. Two suburban, garden-style assets. The GP bought them five years ago with a single JV partner, executed the value-add strategy, and now they’re at the end of the original business plan.

Here’s what makes this interesting:

• A third-party buyer was under contract at $17.6M but couldn’t close
• Instead of re-listing, the GP is buying out the JV partner at a $16.5M valuation
• They’re keeping the same team in place and continuing the hold for another 5 years as a core-plus asset
• The portfolio is already stabilized, 100% and 96.9% occupied, with Freddie Mac debt in place at 4.4% fixed
• There’s still upside from unrenovated units and some rent growth, but no major lift
• Target returns to LPs are ~19% IRR, 2.1x equity multiple, 9.6% avg. CoC

A third-party buyer was under contract at $17.6M but couldn’t close

Instead of re-listing, the GP is buying out the JV partner at a $16.5M valuation

They’re keeping the same team in place and continuing the hold for another 5 years as a core-plus asset

The portfolio is already stabilized, 100% and 96.9% occupied, with Freddie Mac debt in place at 4.4% fixed

There’s still upside from unrenovated units and some rent growth, but no major lift

Target returns to LPs are ~19% IRR, 2.1x equity multiple, 9.6% avg. CoC

Here’s my take:This is not a “new team, new plan” type of syndication. And that’s kind of what makes it compelling. The business plan is already working, and the idea is just to continue executing with the same team and systems already in place. For me, that reduces a lot of risk.

The big variable is the sponsor. I happen to know this operator personally and have been learning from him over the past few months. Very strong track record. 20+ years in business with many full-cycle deals with exceptional performance. That’s honestly the main reason I’m seriously considering this. If it were a weaker operator trying to do this same recap, I’d probably be out.

But I’m still trying to be objective, so here’s my question to the community:

Do you see this as a smart continuation of a strong plan? Or a red flag that the GP is getting liquidity now, and the next group might be stuck trying to exit 5 years from now?

I put together a full diligence package on this for a few folks in my network—so if anyone wants to take a look at what that process looks like or chat about the structure, happy to share.

Appreciate any thoughts or pushback.

Evan Polaski · Answer

@Eric Wilson

I guess my first thought is: is the sponsor actually gaining liquidity, or are they keeping their full position in the deal and only recapitalizing the JV partner?

I would have a little more skepticism if the sponsor is collecting a carry, dispo fee, and "new" acquisition fee, all while reducing their exposure to the deal.   If they want to do that, then let them sell it.  But if they are basically trying to keep their JV partner happy by buying out the JV partner, while not financially gaining in the transaction, I would be more open to this.

My concern as an LP coming in is the assumptions that are driving those returns.  A core-plus deal, with little value add should not be penciling to a near 20% new IRR and a 2x equity multiple.  It sounds like the sponsor is banking on rates dropping in next few years and cap rates compressing significantly.  Even full value-add deals at today's pricing are not hitting those returns without some aggressive (in my opinion) assumptions being used.

Chris Seveney · Answer

Not sure what your question is - the sponsor bought out there jv at what might be under market but jv is probably happy

what am I missing ?

Eric Wilson · Answer

Ya exactly when I said gaining liquidity I meant for their partner in this case. The GP is actually putting in a little more capital $1.4M total on the gp side. It's in a market that doesn't have a ton of investment activity but it's a "slow and steady" market. So from one side the argument could be made that this move is just to give the jv partner his liquidity and new investors end up holding an asset that (while cash flowing) may be difficult to exit. It's a very fair new basis for new investors and I do see the additional upside. Overall it looks like a very good deal with even conservative assumptions which sounds wrong based on the projections but that's how I see it. The strength of the operator is really the selling point for me Anyway I thought it was an interesting scenario to share. Thanks for the feedback

Sponsor Buying Out JV Partner After Buyer Couldn't Close—LP Opportunity or Red Flag?

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