[If you missed the last live event on Capital Calls, you can watch the replay HERE.]
You receive a capital call email. The tone is urgent. The numbers are big. And you are wondering – is this normal or is the deal in trouble?
Over the last 18-24 months, I have reviewed multiple capital call situations for limited partners (LPs). Some were triggered by aggressive underwriting. Others were flashing neon signs of deeper problems. My experience helping LPs navigate these scenarios has shown me just how critical it is to understand the why behind a capital call – before you decide to wire another dollar. Although as an LP you are already in the deal, it is imperative to evaluate the capital call request as if it was a brand new deal.
What Exactly Is a Capital Call?
For clarity, we are not talking about capital calls in a fund structure, where periodic contributions are expected. We are talking about capital calls in single-asset syndications – calls that come after the deal is closed, sometimes even years later.
A capital call in this context is a request for more money from LPs. And while the reasons can vary, they typically fall into one of a few buckets.
Why Capital Calls Happen
Here are some of the most common triggers:
- Capex Underestimation – Heavier lift projects carry more risk. If the operator underestimated the capital expenditure or encountered unexpected issues, they may need more funds to complete the rehab.
- Lack of Operating Reserves – If not enough was raised up front – or if reserves were depleted unexpectedly (for example, escrow for interest rate caps or funding cash flow shortfalls) – a capital call may follow.
- Market Shifts – We have been living in this one over the past 24 months. Rising interest rates, inflation in material costs, or failure to underwrite sufficient cushion into the deal can all result in performance issues.
- Operational Missteps – Sometimes the problem is not external. A poor operator or property manager can lead to higher vacancies or missed revenue targets.
I once worked with an LP in a deal that looked solid on paper. But the sponsor was unable to raise the remaining capital after closing, lost focus during the transition aiming to fill the capital gap, and in the interim operations faltered. The result – a capital call just to keep the deal afloat.
Not All Capital Calls Are Red Flags
Sometimes, a capital call can be strategic. For instance:
- Replacing floating-rate bridge debt with fixed-rate term debt
- A cash-in refinance to finish a value-add business plan
But even then, the details matter.
What to Do When You Receive a Capital Call
If you receive a capital call notice, here is what to look for:
- The Amount and Deadline – You should receive a written notice with your pro-rata share and payment deadline.
- Terms and Consequences – Review the PPM for penalties or dilution clauses, if you choose not to participate.
- Sources and Uses – Ask how the funds will be used and what caused the shortfall – external market shifts or internal execution issues?
- Cash Flow Projections and Business/Exit Plan – Are the assumptions reasonable and in line with the sponsor’s operating history and the current market conditions? Is there still equity left in the deal?
A lack of transparency is a major red flag. I reviewed one deal where the LP was asked to approve a preferred equity tranche and provide capital, but the communication was rushed, vague, and unanswered when questioned. That kind of opacity breaks trust – and that trust is often impossible to rebuild.
How to Mitigate Capital Call Risk
Avoiding bad capital calls starts long before they happen:
- Vet the sponsor’s track record, underwriting assumptions, and capex plan
- Compare the above in the context of the market
- Understand the capital call language in the PPM
- Ask questions before investing – especially about reserves and downside planning
- Monitor performance regularly through updates and dialogue with your sponsor
When communication is clear and consistent, a capital call does not need to be a surprise. If it is, you need to ask why.
Key Takeaways
- Not all capital calls are signs of distress, but all of them deserve scrutiny
- Understand why the capital call is happening before you act
- Review the deal’s revised projections, exit plan, and your rights as outlined in the PPM
- The best defense is proactive due diligence – before you invest
A capital call can be a bump in the road or a red flag for bigger trouble. The difference is in the details and how you respond. Being informed is your best leverage.
Vessi Kapoulian,
Breaking down multifmaily underwriting one step at a time to create educated and empowered investors
P.S.
If you are facing a capital call or need a second set of eyes on a deal, I am here to help. Send me a message. And if you want to avoid getting blindsided in the future, let us talk about how I can support you in your deal reviews.