How We Handle Capital Calls and When They Are Justified

Capital calls are sometimes necessary and sometimes a sign of trouble. The difference matters to LPs.

Here is how we think about capital calls and how investors should evaluate them when they come.

What a Capital Call Is

The operating agreement gives the GP the right to request additional capital from LPs beyond the original commitment. LPs decide whether to participate.

Non participation usually leads to dilution. Per the operating agreement, the participating LPs may receive enhanced ownership in exchange for funding the call.

When Capital Calls Are Justified

Major capex emergency. Roof failure during a winter storm. Boiler replacement in cold weather. Insurance deductible after a major incident.

Opportunistic acquisition. Adjacent property becomes available at a price that materially improves the portfolio.

Refinance gap. Refinance proceeds fall short of expectations. Additional capital needed to complete the refinance.

Capital improvements that drive significant value. Conversion of unused space. Major rebrand. Amenity addition that pays back through rent increases.

When Capital Calls Are Red Flags

Operating shortfall. The property is not covering its expenses. Underwriting missed something material.

Debt service problem. The property cannot cover its debt obligations. Reserves are depleted.

Lender requirement. The lender has demanded additional equity or reserves due to covenant breaches.

These are signs that something is structurally wrong with the deal. The capital call is a symptom, not a solution.

The Communication Standard

Capital calls should come with extensive communication. What happened. Why is additional capital needed. What will it accomplish. What is the projected return on the additional investment.

LPs need this information to decide whether to participate. Sponsors who issue calls without this transparency are not running clean operations.

Pricing the Call

Some operating agreements give participating LPs preferred treatment on call capital. Higher returns. Priority distribution. Different waterfall position.

Other agreements treat call capital like original equity. Same waterfall, same pref.

Read the operating agreement before the call. Understand what your participation will earn relative to the original investment.

Our Approach

We underwrite to avoid capital calls. Reserves are funded to cover normal capex and operating fluctuations. Stress testing identifies likely shortfall scenarios.

When a call has happened in our deals, we have communicated it extensively. We have explained the math. We have offered participation terms that fairly compensated participating LPs.

We have also accepted dilution in deals where the right move was to bring in new equity rather than ask existing LPs for more.

How LPs Should Evaluate

When a capital call comes, do not just write the check. Understand it.

Is the cause an unforeseen event or an underwriting miss. Is the projected return on the additional capital attractive. Are participating LPs being fairly compensated.

Sometimes the answer is yes and you participate. Sometimes the answer is no and you accept dilution. The right answer is deal specific.