Commercial Real Estate Investing From A-Z How Should You Do a Capital Call to Your Investors?
How to approach doing a capital call to your investors? And on the other hand, how should investors decide to give more money for a deal that is in trouble? Mauricio Rauld, securities attorney of Premier Law Group and host of Real Estate Syndicator Live, shares his knowledge.
Read this entire interview here: https://tinyurl.com/3mz7t22h
A lot of people are in trouble, interest rates have doubled, insurance has doubled in many states, and some people have to do capital calls, how would you approach doing a capital call? And from an investor's perspective, how would you choose to participate in it or not?
The first thing we typically advise clients is from my buddy, Ken McElroy, when things aren't going well and things are starting to not go according to plan because lack of cash flows don't happen from one day to the next because those things are going to slowly start happening, the key is to make sure that you double down on your communication with your investors. A lot of syndicators, especially new ones, tend to sort of stick their heads in the sand a little bit when things aren't going well, the investor is going to be upset at us, and we should not tell them, if you're communicating once a quarter and things aren't going well, start communicating once a month or once a week or every day, depending on how severe things are. That way, when it's time to do the cash call, it's not a complete shocker, you've slowly been showing what's going on, it's been a tough environment, we need to refinance, and we can't because the interest rates have gone up and the whatever the situation is. Letting them know earlier will be appreciated by the investors and you’re going to be in a much better situation.
Try to avoid a cash call at the beginning. Usually, if there's the inclining of issues that happen, let's say, rents or revenues down because of whatever reason, then, the first line will be the syndicator. They'll make a loan to the company, they'll make a capital contribution to the project: 1) to show faith that they're confident in the project, 2) the cash call is the last thing you want to do.
For both syndicators and for investors, as you want to look at the operating agreement. If you need $500k, you probably want to ask for $750k. There are a lot of funds out there that are really targeting they might come in and say, look, I know you need 500, I'm going to give you the 500 or I'll give you a million, but then they insert themselves way ahead of everybody else. Obviously, the bank is going to be number one always, but then they're going to be second and they're going to have their money out before any of the LP money comes out.