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Capital calls overview

Capital Calls 

A capital call is a legal right granted to the manager of a partnership or fund to compel payment of money promised to it by investors (limited partners). 

CrowdStreet tries to highlight capital call rights in offerings for users, but you should always review the offering documents fully. 

Below is an example of where to find capital call information on an offering’s detail page.

Participating or not participating in a capital call should be an individual investor choice since they are a limited partner, but failure to participate may have penalties.

Planned vs. Unforeseen/Not Planned 

  • Planned: In some cases, particularly in the case of a fund, capital calls are planned and issued according to a predetermined schedule. 
  • Unforeseen/Not Planned: often referred to in limited partnership operating agreements as “additional capital contributions.” Unforeseen capital calls grant the sponsor or general partner the power to go back to investors and ask them to put more money into an investment on top of their existing equity commitment. Unforeseen capital calls are a relatively rare occurrence, but since they can and do occur, they are worth noting.

Why would an unforeseen capital call occur?

The following are a few of the more common reasons:

  • It is often warranted when an unexpected and sustained drop in occupancy leads to impaired levels of Net Operating Income (NOI), which in turn, causes the property to become capital constrained. Now the operator is in a quandary – it no longer possesses enough capital to fund tenant improvements and leasing commissions to attract new tenants, yet it can only attract new tenants, raise NOI, and return to normal operations by deploying the necessary capital upfront to fund tenant improvements and leasing commissions. Often, the only way out of this predicament is for the operator to issue a capital call.
  • They may be issued in a redevelopment project if the cost of capital renovation goes over budget. For example, a $100,000 elevator refurbishment plan may turn into a $500,000 elevator replacement reality. To the extent that unexpected costs arise in a redevelopment project that are critical to the lease up of a property post-renovation, that cost overrun might only be adequately solved through a capital call.
  • To satisfy changing financing requirements. Such cases were all too common during the Great Recession (2007-2009) as falling property values eroded current equity in a property. In order to refinance maturing loans, owners oftentimes needed to infuse extra capital to hang onto assets and whether the downturn or risk losing properties altogether. 

Investors have the autonomy to choose whether or not they want to participate in a capital call, though they may be penalized for not answering a capital call or otherwise have their interest in the investment diluted. In addition, if the capital call terms are particularly advantageous, investors may have the option to fulfill OTHER investor’s unfulfilled capital calls. By answering unanswered capital calls of other investors, investors are usually given more equity in the deal.

What is the process for capital calls?

CrowdStreet defers to the sponsor for effectuating a capital call. The sponsor will be responsible for notifying all CrowdStreet investors of the capital call and timeline through the CrowdStreet platform. 

Any documentation that needs to be collected will be handled by the sponsor team (though the CrowdStreet team may be requested to help) and the sponsor will answer any investor questions. Once the capital call has been finalized, the sponsor team will upload any documentation for investors to reference within their Investor Room in the Documents section. Depending on the investment, a new Investor Room might be created for a capital call. The CrowdStreet team will ensure that the sponsor is held accountable for keeping your Portfolio Page / Investor Room updated.

Should I answer this capital call?

CrowdStreet cannot provide investment advice or otherwise recommend participating or not participating in a capital call. Please carefully review all of the information provided to you by the sponsor prior to making a decision, and consider working in consultation with legal, financial, and tax advisors.

What happens if I don’t answer a capital call?

The consequences of not answering a capital call are explicitly outlined in the legal documents for your offering; please seek guidance from financial and legal advisors to understand what happens if you fail to answer a capital call. Generally, investors who do not answer capital calls have their investment positions effectively diluted due to the contributions of additional capital made by other investors. Called capital is at times paid in preferred returns (or otherwise granted preference to cash distributions and/or sale proceeds) ahead of the original capital contributed, as a way to offer financial incentives to those investors who contribute additional capital. In some cases investors who do not answer capital calls may lose voting rights or other rights granted through their offering legal documents.

For more information about capital calls, please read this article by CrowdStreet’s Chief Investment Officer, Ian Formigle: Capital Calls in Private Real Estate Offerings