MF Syndication Involving Large Institutional Partner

[David S.]

Let's say that I found a MF Syndication Offering that seems to check most boxes for my investment criteria. The sponsor is well experienced, the value-add MF project will be moderately leveraged with long term fixed rate debt and the underwriting seems conservative. However, in addition to the sponsor’s equity and the equity contributed by regular LP investors like me, there will be an investment fund that will take a majority interest that will significantly outweigh the equity position of the sponsor and the small (lets say retail) limited partners like myself.

Under this scenario, on the one hand, I kind of view this as additional endorsement of the deal. On the other hand, the institutional investor has major decision making power including choosing when to sell the property. There is also some kind of buy-sell shotgun provision that would allow them to take out the regular LP investors at then fair market value at any time after x number of years. One of my concerns is if the value add does not work out or the deal starts to slide due to a recession or other reason, the institutional partner could decide to sell without letting the other limited partners have a say (say via a vote) and thereby force us to sell at a depressed valuation since it would be unlikely we would have the ability to raise sufficient equity to buyout the institutional partner at that time. Another concern is that once the execution risk of the value add has been completed, the institution could decide to buy us out and thereby not allow us to enjoy the full benefits from the value add.

Is my concern that the institutional partner’s interest may not always be aligned with my own interests legitimate or should I take comfort in that they also see this as a deal worth investing in?

[Mike Dymski]

Your concerns are very valid.  None of the other boxes matter if you are uncomfortable with your partner and interests are not aligned.  Address your concerns with the sponsor and move forward or move on.  Take-outs are as important as it gets and deal breakers for many sophisticated LPs.