PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
TO: Pamela Cross, Partner, Calderwood & Harkness LLP Sandra M. Whitfield, General Counsel, Briarwood Family Office LLC
FROM: Theresa Kim, Senior Associate; Owen Fischer, Associate — Funds & Asset Management, Calderwood & Harkness LLP
DATE: March 6, 2024
RE: Excuse/Exclusion Rights Analysis — Meridian Peak Capital Partners Fund IV, L.P. Side Letter Negotiation
MATTER NO.: 1026-00001
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I. Executive Summary
The purpose of this memorandum is to analyze the excuse and exclusion rights currently being negotiated in the side letter (the "Side Letter") between Briarwood Family Office LLC ("BFO") and Meridian Peak Capital Partners Fund IV, L.P. ("Fund IV"), Meridian Peak Capital Partners GP IV LLC (the "GP"), and Meridian Peak Capital Advisors LLC ("MPCA," and together with Fund IV and the GP, the "Meridian Peak Parties"). This memorandum addresses the scope of the proposed excuse categories, the aggregate cap on excused investments, the mechanics of the excuse election, the enforceability of excuse provisions under Delaware law, and relevant market practice benchmarks, and it concludes with specific recommendations for BFO's negotiating strategy.
BFO is negotiating the Side Letter in connection with a proposed $75,000,000 limited partnership commitment to Fund IV. Fund IV is a Delaware limited partnership with a target fund size of $1,500,000,000 and a hard cap of $1,750,000,000. The fund is focused on value-add and opportunistic investments in North American commercial real estate, real estate operating companies, and asset management platform acquisitions. The breadth of Fund IV's investment mandate — encompassing not only traditional commercial real estate assets but also operating companies and platform acquisitions — increases the likelihood that certain investments may fall within categories that are incompatible with BFO's investment policies and the Hargrove family's investment guidelines.
The GP's outside counsel, Ashford Crane & Hewitt LLP (lead partner Harrison K. Drummond; senior associate Elaine C. Woodbury), returned its markup of the initial side-letter term sheet on February 14, 2024. In that markup, the GP accepted the concept of excuse rights in principle but proposed a 15% aggregate cap on excused investments — which, applied to BFO's $75,000,000 commitment, would limit excused amounts to $11,250,000 in the aggregate. On behalf of BFO, Calderwood & Harkness LLP ("C&H") counter-proposed a 25% aggregate cap ($18,750,000) in the revised term sheet delivered on February 21, 2024. The excuse cap remains a key open point in the negotiation. The first full draft Side Letter, dated February 28, 2024, was delivered to Ashford Crane with the excuse cap bracketed at [15%/25%]. On March 4, 2024, the GP returned its markup of the first draft, maintaining the 15% position.
Based on our analysis of the relevant contractual, regulatory, and market practice considerations, we recommend that BFO maintain its 25% cap position ($18,750,000) as its primary negotiating stance. As a fallback, we recommend that BFO accept a 20% cap ($15,000,000), but only if ERISA-related excuses are carved out from the aggregate cap or are subject to a separate, unlimited exception. We recommend that BFO resist the GP's proposed 15% cap ($11,250,000) as overly restrictive relative to current market practice and the specific excuse categories that BFO has identified. If the GP insists on 15%, we recommend that the issue be escalated for direct principal-to-principal discussion at the four-party conference call currently scheduled for March 11, 2024.
Both the Side Letter and the Fund IV Limited Partnership Agreement (dated December 20, 2023, the "LPA") are governed by the laws of the State of Delaware.
II. Background and Procedural History
A. Fund IV Overview
Fund IV is a Delaware limited partnership formed for the purpose of making value-add and opportunistic investments in North American commercial real estate, real estate operating companies, and asset management platforms. The general partner is Meridian Peak Capital Partners GP IV LLC, a Delaware limited liability company whose sole member is MPCA. Fund IV's registered agent is Beacon Statutory Services LLC, located at 1013 Centre Road, Wilmington, Delaware 19805.
Fund IV has a target fund size of $1,500,000,000 and a hard cap of $1,750,000,000. The fund's investment strategy encompasses a broad mandate covering value-add and opportunistic commercial real estate investments across the North American market, investments in real estate operating companies, and acquisitions of asset management platforms. This broad mandate is a relevant consideration in assessing the scope and likelihood of triggering BFO's proposed excuse categories, as discussed in detail below.
MPCA was founded in 2011 by Conrad J. Ellsworth and Priya Narayan. Since its founding, MPCA has raised three prior funds aggregating approximately $3.2 billion in aggregate commitments. Fund IV represents a meaningful step-up in fund size relative to MPCA's prior fundraising history, which underscores the significance of BFO's $75,000,000 commitment and the leverage that this commitment size provides in side-letter negotiations.
The Fund IV Private Placement Memorandum (the "PPM") is dated December 15, 2023. The LPA is dated December 20, 2023. A Form D was filed with the Securities and Exchange Commission on January 2, 2024, in connection with the offering of limited partnership interests in Fund IV.
Fund IV's anticipated first close is April 30, 2024, with a final close deadline of October 31, 2024. The investment period extends for four years following the final close, and the overall fund term is ten years from the final close, subject to two one-year extensions at the GP's discretion. The length of the investment period and the fund term are relevant to the analysis of excuse cap adequacy, as a longer investment period creates more opportunities for investments that may trigger excuse categories.
B. BFO's Proposed Commitment
BFO proposes to commit $75,000,000 to Fund IV. This commitment represents approximately 5.0% of Fund IV's target fund size ($75,000,000 ÷ $1,500,000,000) and approximately 4.29% of the hard cap ($75,000,000 ÷ $1,750,000,000). At either measure, BFO would be a meaningful limited partner in Fund IV, and its commitment size is within the range at which institutional-quality side-letter protections are customarily negotiated and obtained.
BFO is a Delaware limited liability company operating as a single-family office. As of December 31, 2023, BFO had approximately $1.8 billion in assets under management. The proposed $75,000,000 commitment to Fund IV represents approximately 4.17% of BFO's total AUM, a significant allocation that warrants careful attention to the terms and conditions of the investment, including robust excuse and exclusion protections.
BFO's principal is Julian R. Hargrove, who serves as Managing Director and Chief Investment Officer. The proposed commitment to Fund IV requires approval from BFO's investment committee, which consists of four members. Approval requires the affirmative vote of at least three of the four members, and Mr. Hargrove holds a veto right over any proposed investment. Mr. Hargrove's investment guidelines, which reflect the Hargrove family's long-standing investment policies, include specific prohibitions on exposure to certain asset categories, as discussed in Section IV below. These investment policy restrictions are the primary driver of BFO's request for excuse rights in the Side Letter.
C. Negotiation Timeline — Excuse Rights
The following timeline summarizes the key events in the negotiation of the excuse and exclusion provisions:
• January 26, 2024: C&H received the Fund IV LPA, PPM, and subscription documents from Ashford Crane & Hewitt LLP on behalf of the GP and MPCA.
• February 2, 2024: C&H delivered a comprehensive LPA review memorandum to BFO. Among the issues identified in that memorandum, C&H noted that the base LPA contains only narrow excuse and exclusion mechanics, limited to situations in which participation in an investment would cause an LP to violate applicable law or regulation. The memorandum flagged this as an area requiring side-letter negotiation to provide BFO with the ability to be excused from investments falling within categories prohibited by BFO's investment policies.
• February 5, 2024: C&H and BFO discussed and aligned on a side-letter negotiation strategy, including the identification of specific excuse categories to be proposed. The excuse categories were developed in consultation with Mr. Hargrove and reflect the Hargrove family's investment guidelines, BFO's compliance policies, and regulatory considerations.
• February 7, 2024: C&H delivered the initial side-letter term sheet to Ashford Crane on behalf of BFO. The term sheet requested excuse rights for four enumerated categories — (i) cannabis-related assets, (ii) gaming/casino properties, (iii) investments in sanctioned jurisdictions, and (iv) ERISA plan-asset investments — with no aggregate cap on the amount of investments from which BFO could elect to be excused.
• February 14, 2024: The GP, through Ashford Crane, returned its markup of the initial side-letter term sheet. The GP accepted the concept of excuse rights and did not object to any of the four proposed excuse categories in substance. However, the GP proposed a 15% aggregate cap on the total amount of excused investments, applied to BFO's aggregate commitment. At BFO's $75,000,000 commitment level, this would limit the total amount of excused investments to $11,250,000 ($75,000,000 × 15%).
• February 21, 2024: C&H delivered a revised term sheet to Ashford Crane, counter-proposing a 25% aggregate excuse cap. At BFO's commitment level, this would cap excused investments at $18,750,000 ($75,000,000 × 25%). The revised term sheet also included a proposal to carve out ERISA-related excuses from the aggregate cap.
• February 28, 2024: C&H delivered the first full draft Side Letter to Ashford Crane. The excuse cap was bracketed at [15%/25%] to reflect the parties' respective positions, with the final percentage to be resolved through further negotiation. All other aspects of the excuse provision — including the four enumerated categories, the 15 business day election period, and the dollar-for-dollar reduction mechanics — were included in the draft.
• March 4, 2024: Ashford Crane returned the GP's markup of the first draft Side Letter. The GP maintained its 15% cap position and declined to accept the proposed ERISA carve-out from the aggregate cap. The GP's markup did not raise objections to any of the four excuse categories, the election mechanics, or the 15 business day notice period.
The excuse cap thus remains the principal open issue in the excuse rights negotiation. This memorandum addresses the relative merits of the parties' respective positions and provides recommendations for the next round of discussions.
III. Excuse Rights Under the Fund IV LPA
A. Base LPA Provisions
A thorough review of the Fund IV LPA (dated December 20, 2023) reveals that the base LPA contains only limited excuse and exclusion mechanics. Under the existing provisions of the LPA, an LP's right to be excused from a particular investment is narrowly circumscribed and is available only where participation in the investment would cause the LP to violate applicable law or regulation. The LPA does not include an affirmative election mechanism that would allow an LP to opt out of investments on policy-based or investment-mandate grounds. There is no standalone excuse provision addressing cannabis, gaming, sanctioned jurisdictions, or ERISA plan-asset concerns.
The capital call mechanics set forth in the LPA provide that, upon receipt of a capital call notice from the GP specifying the amount of capital to be contributed and the purpose for which it will be used, each LP is required to fund its pro rata share of the capital call within a specified number of business days. Failure to fund a capital call within the prescribed period triggers the LPA's default provisions, which impose severe consequences on a defaulting LP.
Specifically, the LP default consequences under the LPA include, among other remedies available to the GP: (i) forfeiture of a specified portion of the defaulting LP's partnership interest (the LPA provides for forfeiture of up to 50% of the defaulting LP's existing interest), (ii) loss of voting rights with respect to the defaulting LP's remaining interest, (iii) accrual of default interest on the unpaid amount at a rate of the lesser of 18% per annum or the maximum rate permitted by applicable law, and (iv) the GP's right to effect a forced transfer of the defaulting LP's interest to a third party on terms determined by the GP, without the defaulting LP's consent. These default consequences are intentionally punitive and are designed to ensure the reliability of the capital call mechanism. They underscore the critical importance of a robust excuse right as a contractual alternative to default for an LP that is unable or unwilling to fund a particular investment due to policy or regulatory constraints.
B. Need for Side-Letter Enhancement
BFO's investment policy and the Hargrove family's investment guidelines prohibit exposure to certain asset categories, as described in Section IV.A below. These restrictions are not discretionary preferences; they are binding internal policies that govern BFO's investment activities and that BFO has committed to observing in all circumstances.
Without a contractual excuse right in the Side Letter, BFO would face a binary and unacceptable choice upon receipt of a capital call for an investment that falls within a prohibited category: (i) fund the capital call in violation of its own investment policies and the Hargrove family's investment guidelines, or (ii) decline to fund the capital call and be treated as a defaulting LP under the LPA, with all of the severe consequences described above — including potential forfeiture of up to half of BFO's existing interest in Fund IV. Neither outcome is acceptable to BFO.
The excuse right proposed in the Side Letter provides a negotiated middle path between these two extremes. Under the proposed provision, BFO may affirmatively elect to be excused from specific investments that fall within the identified excuse categories, with BFO's unfunded commitment reduced dollar-for-dollar by the amount of the excused investment. This mechanism protects BFO's ability to comply with its investment policies without triggering the LPA's default provisions, while preserving the GP's ability to proceed with the investment using capital from other LPs or by adjusting the investment size.
The excuse right is, in essence, a risk-allocation mechanism that benefits both parties. BFO obtains the contractual flexibility to honor its investment policies, and the GP obtains the certainty that BFO will not default on capital calls — a result that is far more disruptive to the Fund's operations than a properly administered excuse election. A well-drafted excuse provision, with clearly defined categories and a reasonable aggregate cap, serves the interests of both sides of the partnership.
IV. Proposed Side-Letter Excuse/Exclusion Rights — Detailed Analysis
A. Enumerated Excuse Categories
BFO has proposed excuse rights for four specifically defined categories. Each category is described below, together with the rationale for its inclusion and relevant drafting considerations.
1. Cannabis-Related Assets
BFO seeks the right to be excused from investments in properties or operating companies primarily engaged in the cultivation, processing, distribution, or sale of cannabis or cannabis-derived products. This category encompasses both direct investments in cannabis enterprises and investments in real property where the primary tenant or operator is engaged in cannabis-related activities.
The rationale for this excuse category is grounded in both regulatory risk and BFO's internal investment policy. At the federal level, cannabis remains a Schedule I controlled substance under the Controlled Substances Act (21 U.S.C. § 841 et seq.), notwithstanding the legalization of cannabis for medical or recreational use in numerous states. The continued federal illegality of cannabis creates a range of compliance risks for investors, including potential exposure to federal money laundering statutes (18 U.S.C. § 1956), restrictions on access to federally insured banking services, and complications in obtaining property and casualty insurance for cannabis-related properties. Additionally, investors in cannabis-related assets may face difficulties in connection with federal tax reporting, as Section 280E of the Internal Revenue Code disallows deductions for expenses incurred in connection with trafficking in controlled substances.
BFO's investment policy expressly prohibits investments in cannabis-related assets, reflecting the Hargrove family's view that the legal and regulatory uncertainties surrounding cannabis make it an inappropriate investment for a family office with a long-term, preservation-oriented investment philosophy. This policy restriction has been in place since 2018 and has been consistently applied across all of BFO's investment activities.
From a market practice perspective, cannabis-related assets have become an increasingly common excuse category in real estate fund side letters, particularly as the expansion of state-level legalization has increased the likelihood that real estate funds may acquire properties with cannabis-related tenants. As discussed in Section VI.B below, approximately 60% of surveyed 2023–2024 vintage real estate fund side letters include cannabis as an enumerated excuse category.
2. Gaming/Casino Properties
BFO seeks the right to be excused from investments in properties or operating companies primarily engaged in gaming, casino operations, or related hospitality assets where gaming revenues constitute a material portion of income. This category is intended to capture both direct investments in gaming and casino properties and investments in real estate operating companies or platforms whose primary business involves gaming operations.
The rationale for this category is rooted in the Hargrove family's investment guidelines, which have, since the inception of BFO, excluded gaming-related investments for reputational and policy reasons. Mr. Hargrove has consistently instructed BFO's investment team that the Hargrove family does not wish to have exposure to gaming-related revenues, and this restriction has been applied across all of BFO's investment activities, including direct investments, co-investments, and commitments to private funds.
A key drafting consideration for this excuse category is the definition of "primarily engaged" and the threshold at which gaming revenues become "material." We recommend that the Side Letter define these terms with specificity to avoid ambiguity that could lead to disputes between BFO and the GP. Specifically, we recommend one of two approaches: (i) defining "primarily engaged" as deriving more than 50% of gross revenues from gaming, casino operations, or related hospitality activities, or (ii) using a lower threshold (e.g., 25% or 33% of gross revenues) to capture operating companies or properties where gaming is a significant but not necessarily majority source of income. The appropriate threshold should be discussed with Mr. Hargrove to ensure alignment with BFO's investment policy.
As discussed in Section VI.B below, gaming/casino properties are a less common excuse category than cannabis in market practice, appearing in approximately 30% of surveyed side letters. However, this category is regularly seen in side letters negotiated by family offices and certain institutional investors with policy-based exclusions, and the GP has not objected to the inclusion of this category in principle.
3. Investments in Sanctioned Jurisdictions
BFO seeks the right to be excused from investments in jurisdictions subject to comprehensive U.S. sanctions administered by the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury. Comprehensive sanctions programs currently apply to countries and regions including, among others, Cuba, Iran, North Korea, Syria, the Crimea region of Ukraine, and the so-called Donetsk People's Republic and Luhansk People's Republic regions of Ukraine.
The rationale for this excuse category is straightforward: compliance with U.S. sanctions law is mandatory, and violations can result in severe civil and criminal penalties under the International Emergency Economic Powers Act (50 U.S.C. § 1705) and the Trading with the Enemy Act (50 U.S.C. App. § 5). The excuse right provides an additional contractual overlay to the legal prohibitions already applicable to BFO's investment activities, ensuring that BFO is not called upon to fund investments with any nexus to sanctioned jurisdictions, even where such nexus may be indirect or attenuated.
It should be noted that Fund IV's investment strategy is focused on North American commercial real estate, real estate operating companies, and asset management platforms. As a result, this excuse category is unlikely to be triggered with significant frequency. However, the inclusion of this category provides important protection in the event that Fund IV were to consider investments with any connection to sanctioned jurisdictions — for example, through tenant relationships, management contracts, or asset management platform operations that extend to sanctioned regions. The relatively low probability of triggering this category also supports the argument that the aggregate excuse cap should be set at a level that provides adequate headroom for the categories that are more likely to be triggered (i.e., cannabis and gaming).
As discussed in Section VI.B below, sanctioned jurisdictions are a near-universal excuse category, appearing in approximately 90% of surveyed side letters across fund types and vintages.
4. ERISA Plan-Asset Investments
BFO seeks the right to be excused from investments that would cause BFO to be treated as holding "plan assets" within the meaning of Section 3(42) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the regulations promulgated thereunder by the U.S. Department of Labor (specifically, 29 C.F.R. § 2510.3-101, as modified by Section 3(42) of ERISA).
While BFO is not itself an ERISA plan, a "benefit plan investor" as defined in the DOL regulations, or an entity subject to ERISA's fiduciary requirements, BFO seeks to ensure that it is not inadvertently subjected to ERISA fiduciary requirements or prohibited transaction rules through Fund IV's investment activities. The plan-asset regulations provide that if "benefit plan investors" hold 25% or more of the value of any class of equity interests in an entity (the "significant participation" test), the entity's underlying assets will be deemed to be "plan assets" of the investing benefit plan investors. If Fund IV were to invest in an underlying entity whose assets could be deemed plan assets under this test, all persons exercising authority or control over those assets — including, potentially, the GP and, by extension, the fund's LPs — could face exposure to ERISA's fiduciary duty and prohibited transaction rules (ERISA §§ 404, 406).
BFO's concern is not limited to the Fund level. As discussed in Section VII below, the Fund IV PPM indicates that the GP intends to limit benefit plan investor participation at the Fund level to below the 25% threshold. However, the excuse right addresses a distinct scenario: the possibility that Fund IV may invest in a portfolio-level entity where the benefit plan investor participation exceeds the 25% threshold, thereby creating plan-asset status at the portfolio investment level and potentially imposing ERISA obligations on Fund IV and its LPs.
This excuse category was accepted in concept by the GP in its February 14, 2024 markup of the initial side-letter term sheet. The GP did not object to the inclusion of ERISA plan-asset investments as an enumerated excuse category, though the GP's position on the aggregate cap would apply the 15% cap to ERISA-related excuses along with all other excuse categories. As discussed in Sections IV.C.3 and VII below, we recommend that ERISA-related excuses be carved out from any aggregate cap.
B. Mechanics of the Excuse Right
The proposed excuse provision operates through an affirmative election mechanism. Upon receipt of a capital call notice from the GP that identifies a proposed investment, BFO may deliver written notice to the GP within fifteen (15) business days electing to be excused from the identified investment on the basis that the investment falls within one or more of the four enumerated excuse categories.
The fifteen (15) business day election period is designed to provide BFO with adequate time to review the proposed investment, consult with its investment committee and advisors, and make a determination as to whether the investment triggers any of the excuse categories. This election period is consistent with market norms, where the typical range is ten (10) to twenty (20) business days, as discussed in Section VI.C below. The GP has not raised objections to the proposed 15 business day timeline in any of its markups to date.
The effect of a valid excuse election is as follows: BFO's unfunded commitment to Fund IV is reduced on a dollar-for-dollar basis by the amount of the excused investment. BFO would not be required to fund any portion of the capital call attributable to the excused investment, and BFO would not participate in the gains or losses arising from the excused investment. There would be no impact on BFO's capital account with respect to investments from which it has been excused. The GP retains discretion to offer the excused portion of the investment to other LPs on a pro rata or other basis, or to reduce the overall size of the investment.
This structure is well-established in private fund practice and provides a clean, administrable mechanism for implementing the excuse right. The dollar-for-dollar reduction of BFO's unfunded commitment ensures that BFO's total economic exposure to Fund IV is reduced in proportion to the investments from which it elects to be excused, which is an appropriate and equitable result.
C. Excuse Cap — The Key Open Point
The aggregate excuse cap — the total amount of investments from which BFO may elect to be excused over the life of the fund — is the principal unresolved issue in the excuse rights negotiation. The parties' respective positions are summarized and analyzed below.
1. GP's Proposed 15% Cap
Meridian Peak, through its counsel Ashford Crane & Hewitt LLP, has proposed capping the total amount of excused investments at 15% of BFO's aggregate commitment to Fund IV. At BFO's $75,000,000 commitment level, this cap would limit the total amount of excused investments to $11,250,000.
As articulated in the GP's markups and related correspondence, the rationale for the 15% cap centers on three concerns: (i) capital call predictability — the GP has expressed concern that an unlimited or overly generous excuse right could undermine the Fund's ability to rely on its LPs' commitments when executing investments; (ii) investment strategy execution — the GP has argued that a lower cap ensures that the Fund has access to substantially all of its committed capital when pursuing investments within its stated mandate; and (iii) LP parity — the GP has emphasized its desire to maintain a degree of parity among Fund IV's LPs and to avoid granting side-letter terms that create significant disparities in the obligations and economic exposure of different LPs.
While these concerns have facial legitimacy, we assess the 15% cap as below the market median for institutional-quality side letters in the current fundraising environment and as overly restrictive given BFO's identified excuse categories and Fund IV's broad investment mandate. Our specific concerns with the 15% cap are as follows:
First, the $11,250,000 cap could be exhausted relatively quickly, particularly given Fund IV's mandate to invest in real estate operating companies and asset management platforms. These investments tend to be larger in aggregate equity size than traditional property-level investments. If Fund IV makes a single large investment in a real estate operating company with material cannabis tenant exposure or gaming-related operations, BFO's pro rata share of that investment could consume a substantial portion — or potentially all — of the 15% cap.
To illustrate this risk, consider the following scenario: Fund IV identifies a $200 million equity investment in a real estate operating company with material cannabis tenant exposure. Assuming BFO's commitment represents 5.0% of Fund IV's target size, BFO's pro rata share of the capital call would be approximately $10,000,000. If BFO exercises its excuse right for this single investment, it would consume $10,000,000 of the $11,250,000 cap — leaving only $1,250,000 of excuse capacity for all future investments over the remaining investment period. This residual capacity would be wholly inadequate to accommodate even a modest additional excused investment.
Second, the 15% cap does not account for the possibility that multiple investments may trigger excuse categories over the Fund's four-year investment period. BFO has identified four distinct excuse categories, and while not every category is equally likely to be triggered, the breadth of Fund IV's mandate creates a realistic possibility that multiple investments could implicate one or more categories.
Third, as discussed in Section VI.A below, the 15% cap falls at the lower end of the range observed in recent market practice. The median excuse cap in surveyed side letters of 2022–2024 vintage is approximately 20%, with a range extending from 10% to 33%. The GP's 15% proposal is below this median and is inconsistent with the level of protection that a $75 million LP — representing approximately 5% of the fund's target — should expect to receive.
2. C&H's Counter-Proposed 25% Cap
On behalf of BFO, C&H proposed a 25% aggregate excuse cap in the revised term sheet delivered to Ashford Crane on February 21, 2024. At BFO's $75,000,000 commitment level, this cap would limit the total amount of excused investments to $18,750,000.
The 25% cap provides meaningful protection across multiple investments over Fund IV's four-year investment period. It accounts for the possibility that Fund IV's strategy — encompassing value-add and opportunistic real estate, real estate operating companies, and asset management platform acquisitions — may generate multiple investments that trigger one or more of BFO's four excuse categories. At the same time, the 25% cap preserves the GP's legitimate interest in capital call reliability by ensuring that BFO will be obligated to fund at least 75% of its commitment, regardless of the number of investments that fall within excuse categories.
In dollar terms, the $18,750,000 cap represents approximately 1.25% of Fund IV's target fund size of $1,500,000,000. This is a modest allocation that should not materially impair Fund IV's investment capacity or the GP's ability to execute on its investment strategy. Even if BFO exercises its excuse rights to the full extent of the 25% cap, the reduction in Fund IV's available capital would be negligible relative to the Fund's overall size.
Furthermore, the 25% cap is within the commonly observed range of market practice, as discussed in Section VI.A below. While it is above the median, it is well within the range observed for single-family offices with documented investment policy restrictions. The GP's concern about LP parity is mitigated by the fact that BFO's excuse categories are limited, specific, and well-defined — they do not constitute a general opt-out right or a blanket refusal to fund investments.
3. Analysis of 20% as Potential Compromise
Should the GP prove unwilling to accept the 25% cap, we have analyzed a 20% cap as a potential compromise position. A 20% cap applied to BFO's $75,000,000 commitment would yield a maximum excused amount of $15,000,000.
A 20% cap would provide $3,750,000 more headroom than the GP's proposed 15% cap and is consistent with the market median identified in our benchmarking analysis. This level of protection may be acceptable to BFO as a fallback, particularly if it is combined with a provision that carves out ERISA-related excuses from the aggregate cap. An ERISA carve-out would ensure that ERISA-related excuses — which, as discussed in Section VII below, are driven by mandatory regulatory compliance concerns rather than discretionary investment policy preferences — do not consume excuse capacity that may be needed for policy-based excuses (cannabis and gaming).
However, we recommend that BFO accept a 20% cap only as a last resort, and only if the ERISA carve-out is obtained. A 20% cap without an ERISA carve-out would provide insufficient headroom if both investment-policy and ERISA-driven excuses arise during the investment period. Under that scenario, BFO could find itself in the same position as under the 15% cap — with its excuse capacity exhausted after one or two excused investments, leaving it exposed to future investments that trigger excuse categories.
Our recommendation is to accept 20% only if ERISA excuses are carved out from the aggregate cap or subject to a separate, unlimited exception. If the GP will not agree to the ERISA carve-out, we recommend that BFO continue to insist on the 25% cap.
4. Impact on Unfunded Commitment Calculations
Under the proposed mechanics, each amount excused reduces BFO's unfunded commitment on a dollar-for-dollar basis. The following examples illustrate the impact of excuse elections at each proposed cap level:
Example at 25% Cap: If BFO exercises excuse rights for investments totaling $18,750,000 in aggregate (the full extent of the 25% cap), and assuming no prior capital calls for non-excused investments have been funded, BFO's remaining unfunded commitment would be $75,000,000 – $18,750,000 = $56,250,000. In practice, BFO would also have funded capital calls for non-excused investments during the same period, further reducing its unfunded commitment.
Example at 15% Cap: Under the GP's proposed 15% cap, the maximum excuse-driven reduction would be $11,250,000, leaving a minimum unfunded commitment of $75,000,000 – $11,250,000 = $63,750,000 (again, before accounting for capital calls funded for non-excused investments).
An important consideration in this context is the interaction between excuse elections and management fee calculations. Under the negotiated side-letter fee terms, Fund IV charges a management fee of 1.50% per annum on committed capital during the investment period. We recommend that the Side Letter clearly provide that excused amounts reduce the committed capital base for management fee calculation purposes, so that BFO does not pay management fees on capital that it has been excused from investing and that is no longer part of its unfunded commitment. To illustrate the significance: if BFO exercises excuse rights for $18,750,000 (the full 25% cap), and the management fee is not adjusted, BFO would continue to pay a management fee on the full $75,000,000 commitment — an annual overpayment of $281,250 ($18,750,000 × 1.50%). The Side Letter should eliminate this ambiguity.
Finally, the interaction between the excuse provision and the LPA's default provisions must be addressed with precision. The Side Letter must clearly and unambiguously provide that an LP exercising a valid excuse right under the Side Letter is not in default under the LPA for failure to fund the excused capital call. This is a critical provision, without which the exercise of excuse rights could, at least theoretically, trigger the LPA's default consequences. The first draft Side Letter includes language to this effect, but we recommend strengthening it to eliminate any residual ambiguity.
V. Delaware Law Considerations — Enforceability of Excuse Provisions
A. Freedom of Contract Under the Delaware Revised Uniform Limited Partnership Act (DRULPA)
The Fund IV LPA and the Side Letter are governed by the laws of the State of Delaware. Delaware's Revised Uniform Limited Partnership Act (6 Del. C. §§ 17-101 et seq.) ("DRULPA") provides a highly favorable legal framework for the enforcement of excuse provisions negotiated in side letters to limited partnership agreements.
Section 17-1101(c) of DRULPA provides that "[i]t is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements." This statutory directive reflects Delaware's long-standing commitment to respecting the contractual arrangements negotiated by sophisticated parties in the limited partnership context. Delaware courts have consistently interpreted Section 17-1101(c) as establishing a strong presumption in favor of enforcing the terms of a partnership agreement as written, including modifications and supplements agreed upon by the relevant parties. See, e.g., Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286 (Del. 1999); Claveth v. K-Sea Transp. Partners L.P., 67 A.3d 354 (Del. 2013).
A side letter, as a contractual modification to the LPA entered into between the Fund, the GP, and a specific LP, is enforceable under Delaware law provided it is (i) entered into by the requisite parties with the authority to agree to such modifications, and (ii) does not violate the implied contractual covenant of good faith and fair dealing recognized under DRULPA § 17-1101(d). Delaware law does not impose any general requirement that modifications to a limited partnership agreement be agreed to by all limited partners; rather, the authority to enter into side letters that modify the terms of the LPA for individual LPs is typically granted to the GP under a specific provision of the LPA, as discussed in Section V.B below.
Side letter excuse provisions of the type proposed in the BFO Side Letter are well-established in Delaware limited partnership practice. They have been a standard feature of private fund side letters for more than two decades, and we are not aware of any Delaware court decision that has invalidated a properly drafted excuse provision in a private fund context. While the absence of directly adverse authority does not guarantee enforceability in all circumstances, it provides a high degree of confidence that a well-drafted excuse provision, negotiated at arm's length between sophisticated parties, will be enforced by a Delaware court in accordance with its terms.
B. Interaction with the LPA
To ensure the enforceability of the excuse provision and to avoid potential conflicts between the Side Letter and the LPA, several drafting considerations must be addressed.
First, the Side Letter should contain a clear provision stating that, in the event of any conflict or inconsistency between the terms of the Side Letter and the terms of the LPA, the Side Letter controls as between the parties thereto (i.e., BFO, Fund IV, the GP, and MPCA). This is a standard provision in private fund side letters and is essential to establishing the priority of the excuse right over the LPA's capital call and default provisions.
Second, the Fund IV LPA should be reviewed to confirm that it contains a provision authorizing the GP to enter into side letters that modify the terms of the LPA for individual LPs. This type of provision — commonly referred to as a "side letter authorization clause" — is standard in private fund LPAs and provides the contractual basis for the GP's authority to grant individualized terms. We have reviewed the December 20, 2023 LPA and confirm that it contains such a provision, which authorizes the GP, on behalf of the partnership, to enter into side letters with individual LPs that supplement, modify, or waive any provision of the LPA, subject to certain limitations.
Third, BFO's exercise of an excuse right under the Side Letter should be treated as an express exception to the LPA's capital call and default provisions. We recommend including explicit language in the Side Letter confirming that: (i) BFO's election to be excused from an investment in accordance with the Side Letter does not constitute a failure to fund a capital call under the LPA, (ii) such election does not trigger any default, forfeiture, penalty, or adverse consequence under the LPA, and (iii) BFO's rights as a limited partner (including voting rights and distribution rights) are not impaired by the exercise of a valid excuse right.
C. Good Faith and Reasonableness
While Delaware law strongly enforces contractual terms as written, DRULPA § 17-1101(d) provides that a limited partnership agreement "may not eliminate the implied contractual covenant of good faith and fair dealing." This provision means that, even where a side letter grants broad excuse rights, an LP exercising those rights must do so in good faith and may not use the excuse mechanism for purposes that are inconsistent with the intent of the provision.
To address this consideration and to protect against a potential challenge by the GP that excuse rights are being exercised pretextually — for example, to reduce commitment size for reasons unrelated to the enumerated excuse categories — we recommend that the excuse provision include a requirement that BFO's excuse election be based on a good-faith determination that the relevant investment falls within one or more of the enumerated excuse categories. This requirement serves two purposes: it reinforces BFO's commitment to exercising its excuse rights only in appropriate circumstances, and it provides a contractual framework for resolving any future dispute about whether a particular excuse election was proper.
We note that the good-faith requirement should not impose an unreasonable burden on BFO. The determination of whether an investment falls within an excuse category should be based on the information provided by the GP in the capital call notice and any supplemental information reasonably available to BFO. The GP bears the responsibility for providing adequate information in its capital call notices, as discussed in Section VIII.A below.
VI. Market Practice Comparison
A. Excuse Cap Benchmarking
To inform BFO's negotiating position, we have conducted a survey of excuse cap provisions in recent mid-market and large-cap real estate and private equity fund side letters. Our survey covers side letters of 2022–2024 vintage, across a range of fund sizes and strategies, with a focus on real estate funds with investment mandates comparable to Fund IV's.
The results of our survey are summarized as follows:
Based on this data, the GP's proposed 15% cap falls at the lower end of the observed range. While it is not unprecedented, it is below the market median and is more consistent with the caps typically offered to smaller LPs or in side letters with narrower excuse categories (e.g., only one or two enumerated categories).
C&H's proposed 25% cap is above the market median but is within the commonly observed range, particularly for side letters negotiated by single-family offices with documented investment policy restrictions and multiple excuse categories. The 25% cap is also consistent with the caps observed in side letters negotiated by other institutional investors — including endowments, foundations, and public pension funds — that have policy-based exclusions for specific asset categories.
B. Excuse Category Benchmarking
In addition to surveying excuse cap levels, we have analyzed the frequency with which specific excuse categories appear in recent side letters. The following table summarizes our findings:
All four of BFO's proposed excuse categories are within the range of categories commonly seen in market practice. Cannabis and sanctions are particularly prevalent, reflecting the broad consensus among institutional investors that these categories present compliance risks that warrant excuse protection. Gaming is less common but is regularly seen in side letters negotiated by family offices and investors with specific ethical or reputational guidelines. ERISA plan-asset protection is very common and, as noted in Section VI.A above, is frequently subject to a separate carve-out from any aggregate excuse cap.
The GP's acceptance of all four excuse categories in principle — without objecting to any of them in its February 14, 2024 markup — is consistent with these market observations and suggests that the GP views the categories themselves as reasonable. The dispute is limited to the aggregate cap level, not the scope of the excuse categories.
C. Election Period
BFO's proposed fifteen (15) business day election period for excuse notifications is consistent with market practice. Our survey indicates that election periods in comparable side letters range from ten (10) to twenty (20) business days, with fifteen (15) business days being the most commonly observed period. The GP has not raised any objection to the proposed election period in any of its markups, and we do not anticipate that this will be a point of contention in subsequent negotiations.
VII. ERISA Implications — Plan-Asset Excuse
A. Overview of the Plan-Asset Issue
The plan-asset rules under ERISA and the regulations promulgated by the U.S. Department of Labor present a distinct and important regulatory concern that supports BFO's request for an ERISA-specific excuse right and, separately, a carve-out of ERISA-related excuses from the aggregate excuse cap.
Under the DOL's plan-asset regulation (29 C.F.R. § 2510.3-101, as modified by Section 3(42) of ERISA), if "benefit plan investors" (as defined in the regulation) hold 25% or more of the value of any class of equity interests in an entity, the entity's underlying assets are deemed to be "plan assets" of those benefit plan investors. This is commonly referred to as the "significant participation" test or the "25% test."
If an entity's assets are deemed to be plan assets, significant legal consequences follow. All persons who exercise authority or control over the management or disposition of those assets become "fiduciaries" under ERISA and are subject to ERISA's stringent fiduciary duty standards (ERISA § 404) and prohibited transaction rules (ERISA § 406; IRC § 4975). Fiduciary breaches under ERISA can result in personal liability for losses, disgorgement of profits, and excise taxes. Prohibited transactions can give rise to substantial excise taxes under IRC § 4975 as well as potential disqualification of the involved plan.
While BFO is not itself an ERISA plan, a governmental plan, a church plan, or any other type of "benefit plan investor," the concern is indirect: if Fund IV invests in a portfolio-level entity where benefit plan investor participation exceeds the 25% threshold, BFO could be exposed to ERISA's fiduciary framework through its interest in Fund IV's assets. This indirect exposure could create compliance burdens and litigation risk for BFO, even though BFO is not itself a plan or plan fiduciary.
B. Fund IV's ERISA Status
The Fund IV PPM (dated December 15, 2023) addresses the plan-asset issue at the Fund level. According to the PPM, the GP intends to limit the participation of "benefit plan investors" in Fund IV to below the 25% threshold, thereby ensuring that Fund IV's assets are not deemed to be plan assets at the Fund level. The GP, through Ashford Crane, has represented that Fund IV will rely on the significant participation test to avoid plan-asset status.
However, the ERISA excuse right proposed in the Side Letter addresses a different and complementary scenario. Even if Fund IV itself successfully avoids plan-asset status at the Fund level (by limiting benefit plan investor participation below 25%), the concern arises at the portfolio investment level. If Fund IV makes an investment into an underlying entity — for example, a joint venture, a co-investment vehicle, or a subsidiary structure — where benefit plan investor participation in that underlying entity exceeds the 25% threshold, the underlying entity's assets could be deemed plan assets. In that scenario, all persons exercising authority or control over the underlying entity's assets could be subject to ERISA's fiduciary framework, with potential adverse consequences extending to Fund IV and its LPs.
The ERISA excuse right provides BFO with the ability to avoid participation in investments that create this type of indirect plan-asset exposure. This protection is distinct from, and complementary to, the GP's efforts to manage plan-asset risk at the Fund level.
C. Recommendation on ERISA Excuse
We strongly recommend that the ERISA excuse category be carved out from any aggregate excuse cap agreed upon in the Side Letter, or alternatively, that it be subject to a separate, higher (or unlimited) cap. Our rationale is as follows:
First, ERISA compliance is not a discretionary investment policy preference — it is a mandatory regulatory requirement. The other excuse categories (cannabis, gaming, and sanctioned jurisdictions) reflect BFO's investment policies and, in the case of sanctions, overlapping legal requirements. But the ERISA excuse addresses a scenario in which BFO could be subjected to an entirely separate regulatory framework — one that imposes fiduciary duties, prohibited transaction rules, and potential personal liability — through no action of its own. A GP should not be in the position of forcing an LP into an investment that creates ERISA fiduciary exposure.
Second, an aggregate cap that includes ERISA-related excuses could leave BFO with insufficient excuse capacity for policy-based excuses if a single ERISA-related excuse consumes a significant portion of the cap. This is a particularly acute concern given that ERISA-related investments may involve large capital deployments, and BFO's pro rata share of a single ERISA-triggering investment could represent a substantial dollar amount.
Third, as discussed in Section VI.A above, approximately 40% of surveyed side letters include a specific ERISA carve-out from the aggregate excuse cap. While not yet a majority practice, this approach reflects a growing recognition among GPs and their counsel that ERISA-related excuses should be treated differently from policy-based excuses.
If the parties agree to a 20% overall cap as a compromise, we recommend that ERISA-related excuses not count toward the 20% cap. Under this formulation, BFO would have $15,000,000 of excuse capacity for policy-based excuses (cannabis, gaming, and sanctions), with an unlimited (or separately capped) right to be excused from ERISA plan-asset investments. This structure appropriately distinguishes between regulatory-driven and policy-driven exclusions and provides BFO with meaningful protection across all categories.
VIII. Practical Considerations and Drafting Recommendations
A. Drafting the Excuse Provision
Precise drafting of the excuse provision is essential to ensure its administrability and to minimize the risk of disputes between BFO and the GP over the scope and application of the excuse categories. We offer the following specific drafting recommendations:
Category Definitions. Each excuse category should be defined with specificity. Vague terms such as "related to" or "associated with" should be avoided in favor of more precise formulations. For the cannabis and gaming categories, we recommend using the formulation "primarily engaged in," supplemented by a revenue-based threshold (e.g., "primarily engaged in" means that more than 50% of the entity's gross revenues are derived from the specified activity). For the sanctions category, the definition should reference comprehensive U.S. sanctions programs administered by OFAC, with a mechanism for updating the list of sanctioned jurisdictions as new sanctions are imposed. For the ERISA category, the definition should track the language of the DOL's plan-asset regulation and Section 3(42) of ERISA.
Notice Mechanism. The Side Letter should specify with precision the notice mechanism for excuse elections. BFO must deliver written notice to the GP within fifteen (15) business days of BFO's receipt of the capital call notice identifying the proposed investment. The notice should identify the excuse category or categories that BFO believes are applicable and should include a brief statement confirming that BFO's election is based on a good-faith determination that the investment falls within the identified category or categories.
GP Disclosure Obligations. The effectiveness of the excuse mechanism depends on BFO receiving sufficient information about proposed investments to make timely and informed excuse determinations. The Side Letter should specify the information that the GP must include in each capital call notice, including at a minimum: (i) a description of the proposed investment, (ii) the asset type and property type, (iii) the jurisdiction(s) in which the investment is located, (iv) a description of the primary tenant or operator profile, including any cannabis- or gaming-related tenants or operators, and (v) information regarding the participation of benefit plan investors in the investment (if applicable). Without adequate disclosure, BFO cannot meaningfully exercise its excuse rights within the 15 business day election period.
Personal Nature of the Excuse Right. The excuse provision should specify that the right is personal to BFO and is not transferable to any assignee or transferee of BFO's limited partnership interest, except in connection with a permitted transfer to a Hargrove family entity (as defined in the Side Letter). This is a standard provision that prevents excuse rights from being transferred to parties that do not share BFO's investment policy restrictions.
B. Interaction with MFN Rights
BFO's most favored nation ("MFN") right, as proposed in the Side Letter, would entitle BFO to elect the benefit of certain terms granted to other LPs that have committed $50,000,000 or more to Fund IV. The MFN right is subject to a carve-out for terms granted to Anchor Investors (defined as LPs committing $200,000,000 or more) and for certain regulatory-driven accommodations.
The MFN right has the following potential interaction with the excuse rights:
If another LP obtains a higher excuse cap (e.g., 30%) or additional excuse categories (e.g., firearms, tobacco, or fossil fuels) in its side letter, BFO could potentially exercise its MFN right to adopt those more favorable terms, subject to the 20 business day MFN Election Period specified in the Side Letter. This provides BFO with an additional mechanism for expanding its excuse protections if more favorable terms are granted to other LPs during the fundraising process.
However, the MFN clause contains carve-outs for regulatory-driven terms, including ERISA-specific accommodations, tax-exempt investor accommodations, and governmental plan accommodations. These carve-outs may limit BFO's ability to use the MFN right to adopt ERISA-specific excuse enhancements that are granted to other investors whose regulatory status (e.g., as a governmental plan or a benefit plan investor) differs from BFO's.
We recommend confirming in the Side Letter that excuse rights are within the scope of MFN-eligible terms, subject to the existing regulatory carve-out categories. This will ensure that BFO can take advantage of more favorable excuse terms granted to other LPs of comparable size, while acknowledging the GP's legitimate interest in limiting the applicability of regulatory-specific accommodations.
C. Interaction with Co-Investment Rights
If BFO is excused from a Fund IV investment, a question arises as to whether BFO could nonetheless participate in the same investment on a co-investment basis — that is, as a direct investor outside the Fund structure. This scenario is unlikely for investments within BFO's excuse categories, as BFO is exercising its excuse right precisely because it does not want economic exposure to the investment. However, the Side Letter should be clear on this point to avoid ambiguity.
We recommend that the Side Letter include a provision confirming that BFO is not obligated to co-invest in any investment from which it has been excused under the excuse provision. The co-investment provision (which provides BFO with a pro rata right to co-invest in investments exceeding $100,000,000 in equity on a no-fee, no-carry basis) should be read independently from the excuse provision, such that BFO's exercise of an excuse right with respect to a particular investment does not affect its co-investment rights with respect to other, non-excused investments.
IX. Recommendations
Based on the analysis set forth in this memorandum, we recommend the following approach for the continued negotiation of the excuse rights provisions of the Side Letter:
A. Primary Position: Maintain 25% Cap ($18,750,000)
BFO should maintain its position that the aggregate excuse cap be set at 25% of BFO's committed capital, yielding a maximum excused amount of $18,750,000. The 25% cap provides adequate headroom for BFO to exercise excuse rights across four enumerated categories over Fund IV's four-year investment period. This position is consistent with the upper range of market practice and is well justified by BFO's specific investment policy restrictions, the breadth of Fund IV's investment mandate, and the documented need for multiple excuse categories.
In communicating this position to Ashford Crane, we should emphasize that BFO's excuse categories are limited in number, specifically defined, and subject to a good-faith exercise requirement. The 25% cap is a backstop against a worst-case scenario involving multiple excused investments, not an invitation for blanket opt-outs from Fund IV's investment program.
B. Fallback Position: Accept 20% Cap ($15,000,000) with ERISA Carve-Out
If the GP is unwilling to accept the 25% cap, BFO should be prepared to accept a 20% cap ($15,000,000), but only if ERISA-related excuses are carved out from the aggregate cap. Under this formulation, ERISA-related excuses would not count toward the 20% cap, ensuring that BFO retains adequate excuse capacity for investment-policy-driven categories (cannabis, gaming, and sanctions) while also preserving unlimited (or separately capped) protection against ERISA plan-asset exposure.
A 20% cap without an ERISA carve-out should be resisted. Without the carve-out, a single large ERISA-related excuse could consume a disproportionate share of the aggregate cap, leaving BFO with insufficient headroom for policy-based excuses. This outcome would undermine the purpose of the excuse provision.
C. Resist 15% Cap ($11,250,000)
The GP's proposed 15% cap is below the market median, is overly restrictive for a four-category excuse right, and could be exhausted by a single large excused investment. BFO should not accept this level of protection.
If the GP continues to insist on 15% following further negotiation, we recommend escalating this point to the four-party conference call currently scheduled for March 11, 2024. That call, which will include representatives of C&H, BFO, Ashford Crane, and Meridian Peak, provides an appropriate forum for direct principal-to-principal discussion of the excuse cap. We believe that a direct conversation between Mr. Hargrove (or Ms. Whitfield, on BFO's behalf) and