THE PARTNER QUIT MID-REHAB

A few weeks ago, one of the loans in our portfolio nearly lost its most important asset. Not the property. The person.

Every deal is a bet on a person. Underwrite the day the person leaves.

Here is what happened, with details changed to protect privacy.

Two partners were mid-rehab on a project we financed. One brought the capital. The other brought everything else. He was the contractor running the job and the agent who would sell it. Then, halfway through the project, they split.

I am not going to get into why. It does not matter why. What matters is what was left standing the day after: a capital partner with real money in the deal and no construction experience, no draw management experience, and no plan for the exit.

Here is what did not change that day. The purchase basis: unchanged. The after-repair value: unchanged. The loan terms: unchanged. Every number on the original underwriting sheet still said this was a good deal.

The pro forma survived. The partnership did not.

The C That Can Walk Out the Door

In lending we underwrite the Four Cs: Character, Capacity, Collateral, Capital. Most investors obsess over the last two because they are the easiest to measure.

Here is what this deal taught in real time: Capacity is the only C that can walk out the door.

Collateral does not quit. Capital does not take a better offer. Capacity drives home one night and does not come back.

What Happened Next

This is the part I care about, because it is the difference between a lender and a check.

We gave the remaining partner four vetted contractor options. Not a list of names. Four operators matched to this specific scope of work, people we have seen perform. And my wife Camille, who runs every internal valuation we do and has spent over a decade in this market, stepped in as the listing agent for the exit.

The project kept moving. The capital stayed protected.

Not because the deal was good. Because the infrastructure around the loan was real.

The Allocator Lesson

This goes way beyond private lending. Whatever you are invested in right now, a syndication, an operating business, a fund, a small partnership, run this test: what happens if the key person quits at the halfway mark?

If the answer is a detailed, boring, operational answer, bench strength, documented processes, a lender or sponsor with real local relationships, you are invested in a system.

If the answer is a shrug, then the shrug is your real risk exposure. Not the pro forma. Not the market. The shrug.

I have funded 81 loans and $32.9M since I started lending my own capital and I have never lost a dollar of principal. People hear that and assume it is about picking good deals. It is not. It is about being structurally ready for the day a good deal loses its person.

Every deal is a bet on a person. The discipline is deciding, before you wire a dollar, what happens when the person changes.

Who is the key person in your biggest investment, and have you ever asked your sponsor the halfway-mark question? Reply to this email. I read every response.

Devon

P.S. The Four Cs framework runs through everything I do. I wrote about it at length in my books, but watching Capacity walk off a live job site taught me more than any chapter I have read. Or written.

Newsletter Edition #204