Recapitalization financing and distribution approval

A recapitalization should show separately what enters the property company, what repays obligations, what remains restricted and what may be distributed to owners. Gross financing proceeds are not the same as distributable cash. A transaction can create cash in an account while the loan documents, entity agreement or applicable law limit its use.

A historical construction loan agreement, Sections 5.28–5.29, illustrates specific distribution restrictions. Delaware LLC law, including Sections 18-601 and 18-607, separately addresses distributions and limits in its jurisdiction. These sources do not determine whether a proposed recapitalization elsewhere is permitted. Counsel must evaluate the actual documents, entity law and transaction facts.

Draw the capital movement before calculating a return

Identify whether the transaction is new debt, replacement debt, new equity, an owner-to-owner interest purchase or a combination. Record the entity receiving each dollar and the obligation it pays. Money paid directly to a selling investor may never enter the property company. A lender reserve may be funded principal but unavailable for distribution.

Assume a hypothetical replacement loan of $7 million. Closing uses are $5 million existing payoff, $140,000 costs, $300,000 required reserves and $160,000 unpaid project obligations. Cash left after those uses is $1.4 million. That is a residual cash calculation, not yet a distribution authorization.

Suppose the approved transaction plan requires another $400,000 to remain in the borrower for upcoming leasing obligations outside the already funded reserve. Potential owner distribution falls to $1 million. The two retained amounts have different identified purposes; confirm they are not duplicate budgets for the same bills.

Reconcile the owner allocation separately

Assume the hypothetical entity agreement allocates the first $250,000 of an authorized distribution to a specified priority and the remaining $750,000 60% to Investor A and 40% to Investor B. The residual allocations are $450,000 and $300,000. If A also receives the $250,000 priority, A receives $700,000 and B receives $300,000.

This simplified waterfall is invented and does not establish tax treatment, return of capital or a preferred-return calculation. The actual agreement may require capital-account, timing or other adjustments. A financing worksheet should pass the authorized distribution amount to the entity waterfall rather than inventing the waterfall from ownership percentages alone.

If the new loan is reduced by $300,000 with all other stated uses unchanged, potential distribution falls from $1 million to $700,000. Under the same hypothetical allocation, the priority remains $250,000 and residual is $450,000. A receives $520,000 and B $180,000. Final total distributions are not a simple 60/40 split because A receives the $250,000 priority first. The marginal $300,000 reduction does split 60/40 here: A loses $180,000 and B loses $120,000 while the priority remains fully covered. A deeper reduction that exhausts the residual tier would require another calculation.

Check whether new equity actually supports the property

Suppose a new investor contributes $500,000 to the borrower at the same closing but the transaction immediately distributes that full amount to existing owners. The property has received no net additional cash from that round trip. Its ownership and future distribution rights may change, but the operating liquidity analysis should not claim a new $500,000 buffer.

If instead $200,000 of the contribution is retained and $300,000 distributed, only $200,000 increases property cash. Identify any preferred payment or redemption obligation created by the new capital and include its actual cash requirements in the forward model. Describing capital as equity does not answer every lender-consent or cash-priority question.

Make approval a documented closing condition

Prepare the proposed funds flow, retained-cash schedule, owner allocation and before-and-after capital structure. Link each proposed distribution to the relevant loan consent and entity approval. If a condition is unresolved, model the cash as retained rather than representing distribution as certain. The final decision belongs to the authorized parties and applicable law, not the spreadsheet.

After closing, reconcile actual proceeds, paid obligations, reserve balances and distributions to the approved schedule. Track future release conditions separately; a restricted reserve expected to return later is not a second current distribution. The useful recapitalization analysis explains how much cash owners can receive while preserving the capital and obligations required for the property to operate and repay its financing.