Sponsor Capital Funds
The Sponsor Capital Funds Practice at Duval & Stachenfeld focuses on advising real estate sponsors, developers, gap equity" providers and other investors in the formation of, and investment in, "sponsor capital funds" (also sometimes referred to as "seed capital funds" or "GP capital funds") and similar pooled investment arrangements.
The Sponsor Capital Funds Practice is co-chaired by partners
Terri Adler, who heads our 50-lawyer real estate department;
Pej Razavilar, a rising-star junior partner; and
Bruce Stachenfeld, founder of the Firm’s real estate practice and the Firm’s managing partner.
The goal of the Firm’s partners in this practice area is to provide strategic advice, economic and legal advice to:
Developers, investors and similar parties raising sponsor capital funds for their own use;
Investors desiring to provide gap equity to real estate developers, investors and similar parties who have a need for such capital; and
Investors making minority or more significant investments in these funds.
Sponsor capital funds are sometimes raised by developers or sponsors themselves for deployment in their own development transactions. At other times these funds are raised by investors in order to provide so-called “gap equity” to sponsors and developers who don’t have quite enough capital, or credit, to fulfill their share of development transactions.
Having sponsor capital available to a developer (either its own funds or funds from a gap equity provider) is of great benefit, as it permits the developer to bid with greater credibility in a real estate transaction and also permits the developer to have greater bargaining power when negotiating with third parties.
Despite their advantages, these funds are tricky for a number of reasons:
First, there are many monetary issues that can have an extremely positive (or negative) effect upon the sponsor’s upside. Consider, for example, the most obvious issue of crossing promotes in a fund structure and its effect on the ultimate economics to the party raising the fund. For these and other reasons, the structuring of one of these funds can have a great deal of economic upside or downside for the party raising the funds.
Second, if the party is a gap equity provider, there are invariably going to be multiple layers of joint ventures involved in every deal, which are very tricky to negotiate, as all the joint ventures need to knit together properly or the parties can be at loggerheads, or worse.
Third, often a “strategic investor” will want to invest in the fund and use this investment to obtain a so-called “side-car”, and other economic and control rights, in order to co-invest in the transactions. The terms of these side-cars and other rights are of great importance to both the party raising the fund and the strategic investor.
Fourth, there are simply not enough of these funds for there to yet be agreement upon what is “market”; accordingly, almost anything goes in structuring and negotiation.
For all of these reasons, interaction with the right counsel is of critical importance. This is a place where the right lawyers can add a lot of dollars to the client and inexperienced lawyers the converse.
This area is one of the Firm’s real estate group’s sweetest sweet spots. This is because co-ventures is the area that first made Duval & Stachenfeld a force in the real estate world. Since sponsor capital funds are a natural extension of this expertise, we have naturally migrated into it.
Our team also likes the fact that the lack of agreement on what is “market” allows our team to be creative on behalf of our clients and create real value for them.