This is one of the least discussed concepts in real estate investing (and the one clause nobody reads carefully enough) and one of the most important to understand before you write a check.
A capital call is when a sponsor goes back to existing investors and asks for more money after the initial equity raise.
Here is when it happens. A property needs unexpected repairs. A tenant blows out and the property needs to carry vacant for longer than projected. Interest rates move and debt costs increase. The business plan requires additional capital to execute.
Depending on how the operating agreement is structured, investors may be obligated to fund the capital call. If you signed an agreement with a capital call provision and the sponsor issues one, declining can have consequences such as dilution of your ownership stake or worse.
This is why conservative underwriting and adequate reserves matter before you ever invest.
A few things to ask before you commit to any deal:
1. Does the operating agreement include a capital call provision? If so, under what circumstances can the sponsor issue one?
2. What reserves are being set aside at closing for capex and operating shortfalls?
3. What is the sponsor's track record -- have they had to issue capital calls on prior deals, and why?
At Westlake, we underwrite with reserves built in and conservative assumptions on lease-up timing and exit. The goal is to never need one. But understanding the mechanism before you invest is not pessimism. It is due diligence.
Have you ever been in a deal that issued a capital call? What drove it?
Wednesday Real Estate 101: The capital call
