Cross Collateralization
Two different properties, same sponsor but different LPs. Would cross collateralization even work given the different ownership composition of each asset? Why would LP in Property A want to be on the hook for Property B which they have no interest in?
Cross-collateralization involving two different properties with the same sponsor but different limited partners (LPs) presents a complex scenario, especially considering the distinct ownership compositions of each asset. Here's a breakdown based on the most helpful WSO content:
Cross-Collateralization Basics: Cross-collateralization refers to using more than one property as collateral for a loan or multiple loans. This strategy can provide the borrower with more flexibility and potentially more favorable loan terms due to the increased security for the lender.
Challenges with Different LPs: The primary challenge in a situation where two properties have different LPs is the differing interests and stakes in the properties. Each LP group has invested in a specific property for particular reasons, and their risk exposure is intended to be limited to that property.
LPs' Concerns: LPs in Property A might be hesitant or outright opposed to cross-collateralizing their asset with Property B for several reasons:
Potential Justifications: Despite these challenges, there might be scenarios where cross-collateralization could be considered, such as:
Necessity for Clear Agreements: Any arrangement involving cross-collateralization in such a scenario would require clear, detailed agreements outlining the responsibilities, risks, and benefits for all parties involved. This includes mechanisms for decision-making, conflict resolution, and potentially an exit strategy for LPs not comfortable with the arrangement.
In conclusion, while cross-collateralization with different LPs for each property is theoretically possible, it would require careful consideration, transparent communication, and likely, significant concessions or guarantees to the LPs not directly benefiting from the arrangement. The complexities and potential for conflict make it a challenging strategy to implement successfully.
Sources: https://www.wallstreetoasis.com/forum/real-estate/using-100-equity-for-a-project-does-it-ever-make-sense?customgpt=1, Anyone own any property on the side?, Investment Sales Vs. Debt/Equity Brokerage, So you want to work in CRE Debt? Here are the options..., Private Credit Secondaries Case Study Insight
Sounds sketchy. The sponsor could maybe cross collateralize his interest but it would be insane for two different LPs to cross collateralize
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