Deal Size and Flow. One important issue is future deal flow. Charles Wu says that Charlesbank Capital Partners normally would not cO\lsider a deal as small as $3 million, but when the deal initiates a new relationship with an operating partner who can generate many more deals, it is willing to spend the time to underwrite a smaller than average investment. The prospect of a number of deals from a major local developer makes the effort worthwhile. 28 Clawback. Another important issue is the pooling of deals with an operating partner. Charlesbank insists that all deals with a single operating partner be pooled and subject to a clawback. A clawback gives the financial part- ner the ability to reclaim profits paid to the operating partner in one deal if a subsequent deal performs poorly. Without the pooling, Wu says, "the operating partner has an incentive to 'swing for the fences' every time, because he gets the promote on good deals while Charlesbank eats the losses on the bad deals." In arrangements involving pools of property with one operating partner, Charlesbank arranges an amount of money for the operating partner to invest over a two-year period called a program. The pool of properties subject to the clawback is determined by the size of the program. For example, the program may call for Charlesbank to fund, say, $30 million in equity over two years. If the full $30 million has not been invested within two years, the program duration may be extended or a new pool may be started. The operating partner would prefer to start a new pool immediately to limit the properties subject to the clawback. Dead Deal Cost. Another important deal point is the dead deal cosl-what happens when money is spent chas- ing an acquisition that does not go through. Due dili- gence costs on a major purchase can easily run up to $100,000. Who should bear the loss? One would expect that if the financial partner puts up 75 percent of the profit, he should bear 75 percent of the loss. Charles- bank, however, requires the operating partner to pay two-thirds of any dead deal costs, because it wants th~ operating partner to be careful with the money spent looking for deals. Control. Among the major deal points, control is perhaps the most important. Financial partners have learned that the hardest part of correcting a problem property is often getting control of the asset. The buyl sell clause is intended to deal with this risk. "Capital partners love the clause; operating partners hate it," according to Wu. The operating partner is concerned that the capital partner will activate the buy/ sell clause at a time when capital is scarce and steal the deal from the operating partner. The capital partner is concerned that the operating partner has much more informa- tion than he has. He may trigger a buy/ sell knowing that a major tenant has decided to leave or that one is about to be signed. The operating partner's protection that the buy/ sell clause will not be used indiscrimi- nately is the financial partner's reputation for using them rarely.
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- Summer '20
- developer, Square foot, industrial building, The Grave