Ground up development project, developer purchased land several years ago, re-entitled and wants to sell the deal to a new venture (staying in as the 5% GP) to actually build it out.
Developer is getting a nice mark up on the land value and cashing most of it out at closing. They have been consistent in wanting a break ground by a certain date and are looking for certainty from an equity partner so they can move forward. Finally got through an agreed upon LOI/term sheet, and now they are asking for hard money to assure the equity won't bail prior to the official JV agreement being drafted/negotiated/executed. Deposit they are asking for is substantial.
Given the exposure that something could/would go awry before a bona fide partnership agreement is completed, I am unsure of how to approach this to provide comfort to the LP without them thinking they are being asked to bend over and take the hard one on the deposit. I have firsthand seen deals where term sheets were accepted and JV agreements never ultimately got signed due to a variety of reasons. Of course, there could be legal ways of making the deposit hard contingent on certain things, but then it's not really a hard deposit. Just wanted to see how others might approach this, or if the request should be flat out rejected.
What is the size of the deal...land price? Construction budget? Value upon completion? Also, is the lender lined up with something close to a commitment? If not, it's pretty tough to get hard deposit money without a loan in hand even if fully entitled.
I'm not sure I understand. If there is a deposit, it should be for the purchase of the land, not for the execution of partnership documents. Perhaps alongside the deposit there should be an option for the JV partner to buy the original owner out at some strike price?
It's pretty reasonable for the developer to want a deposit; they are "selling" the land to the new venture. It doesn't make a ton of sense to me why the LP is so concerned about "taking a hard one;" it's no different than any other land purchase. I can see where they would be concerned that the original owner leverages their deposit to hold out for better partnership terms, but again, that seems pretty easily solved so that the developer can't walk away and take the deposit.
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