Cheat Sheet for Capital Calls/Sponsor and/or Member Loans!

This is a continuation of recent posts by Kaliser & Associates PC because the use of capital call provisions and sponsor/member loans are becoming more common than not, in light of interest rates, huge increase in insurance, softening in some markets of rents, and payments of interest rate extensions.

Below is a very generic look at options that sponsors may be able to utilize (subject to their loan docs and subject to legal counsel guidance).
 

1. Sponsor or Member Loan(s) – Depends on the loan documents and entity structure as to whether it violates mortgage documents, but if it doesn’t, it is nice because you don’t need investor consent, there is a fixed cost, and it is prioritized above member distributions.
2. Capital Call – Must give every investor 30 days to contribute their pro rata share of the new amount you need. If some investors do not participate, you can go to the participating investors to see if they want to fill gap. You will want to ensure guarantors are not falling below any lender required ownership thresholds and that other LP’s don’t exceed any lender ownership percentage threshold.
   • Side Letter – Typically used in conjunction with #1 and #2 above. Most commonly used to incentivize larger loans or capital contributions. Most common what we are seeing is allocating a portion of the sponsor’s GP distributions to the other party. You could also offer a portion of the asset management fee or other management fees you are taking. A side letter works so long as its terms do not directly impact the other LP’s (i.e. the total percentages they are receiving stays the same – your percentage is just being reallocated).
   • Create a Pref Class - Typically used in conjunction with #2 above. Most commonly used to incentivize larger loans or capital contributions. You offer parties contributing in the capital call an 8% (most common number we are seeing right now) preferred return and their distributions and return of capital are prioritized over original investment. Need LP consent to do this.
3. Preferred Equity – This will likely need the consent of the investors. Typically, would involve creating a separate class for this private equity group that is prioritized above all your LP’s and they would have more rights than a typical LP. You’d need the lender to sign off as well.
4. New Offering – Once you have tried the capital call, if you are still not able to raise sufficient funds, you could create a new PPM and do a new offering bringing in new outside LP’s. They would be treated the same as the existing ones, unless you amended the agreement to do something like creating a pref class. You will want to ensure guarantors are not falling below any lender required ownership thresholds and that other LP’s don’t exceed any lender ownership percentage threshold.

USE LEGAL COUNSEL WHEN DETERMINING WHICH OPTIONS CAN BE UTILIZED AND IN WHAT ORDER.