There are generally four types of protection in investments:

1. the fee structure,

2. the guarantees,

3. the clawbacks & creeping equity provisions and

4. the control provisions.

The Fee structure: There are numerous ways the counterparty can make money in a deal at the expense of the investor. Counterparty can charge asset management fee, property management fee, credit enhancement fee, leasing fee, project management fee and development fee. You should be careful, read the full document and seek expert advice if necessary.

The guarantees: As a passive investor you need protections. Most of the time, the counterparty provides various types of guarantees for which they may charge a fee. The project completion guarantee is the most common of them. There can be others like performance guarantee.

What are the penalty provisions allowing you to “creep” into the equity of the counterparty?

What are the control mechanisms? What items need a majority or super-majority (75%+) of investor vote? Critical decisions like approval of business plans or changes to a plan, material budget variances, major leases and sale or refinancing transactions should require a majority.

The Exit: Most private investments in real estate have pre-determined maturity date. There can be extension clause. As a good investor you should know your exit strategy before you investment.

Exit mechanisms come in many forms. Exits could be in the form of dividend distributions, sale of shares, sale of asset, interest payments on debentures, refinancing, or all of the above.

In certain circumstances, investors and counterparties use a forced sale to an independent third party or a buy-sell between the parties.

If your objectives and counterparty’s objectives are not aligned, there can be delay in the exit. For example, the counterparty may value the fee stream as opposed to realization on a marginal deal.

You should also be asking – What are the obligations of the counterparty to liquidate the investment? When and how can you as investor force liquidation?

These are the steps to be followed to structure a real estate deal and before investing in any real estate asset or any other instrument with real estate asset as collateral.

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