Dinn, Hochman & Potter, LLC

Equity funds useful for capital, but with strict conditions

If you are a real estate developer, you likely understand how important it is to promote your company as being successful and capable of bringing important projects to fruition. Simply having name recognition can help you acquire valuable business.

But the truth is, while you may be the focal point of a development deal, it takes other parties working in the background to fund the project. And what this means is that your success is contingent upon making sound financial agreements that protect your interests.

A private equity fund can provide the capital you need for a project, but it will also probably control a super-majority of the equity. In doing so, an equity fund possesses the right to make final decisions, giving it ultimate power.

This is why, when working with a private equity fund, you have to be extremely careful when drafting a business plan. You see, if you should be forced to drift from the terms of the plan in order to complete the project in a manner in which the equity fund does not approve, it could move in and take control of the property, taking you completely out of the picture.

With such power, it is easy to understand why private equity funds have assumed the lead role in real estate development. And since they wield so much financial strength, you as a developer are going to have to work with one of them at some point. When you do, it is imperative that your business plan affords you the opportunity to complete the project the way you see fit without fear of the equity fund seizing total control.

To this end, before you agree to a business plan with a private equity fund, it could be extremely wise to have an experienced business litigation attorney make sure that the terms are reasonable and achievable. And if at some point the equity fund attempts to remove you from the project, the attorney can help you offer a legal response.

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