How to Handle Capital Calls in a Reg D Syndication: Making the Best of a Tough Situation

Imagine the discomfort of reaching out to your investors, your friends and family, asking for more money to keep things afloat. It's a scenario you'd want to avoid, but sometimes, it's inevitable. It could be due to unexpected expenses like a lawsuit, deferred maintenance, or an unforeseen event not covered by insurance.

There are two common ways to handle this. One is treating it like a loan. You ask your investors for an additional sum, say $500,000, and promise to repay them with an agreed-upon interest rate. This ensures they get their money back before any other distributions are made.

The second approach is a mandatory capital call. Here, you ask each investor to contribute a specific amount, reflective of their equity share. Say, each owns 10% so they need to contribute $50,000. If they don't, their equity share decreases by more than the unpaid amount.

While the second approach might seem confrontational, it's sometimes necessary. The point here is that, as a syndicator or fund manager, you should consider these possibilities and include them in your operating agreement. It ensures transparency and protects all parties involved.

Read more about PPMs - What is the purpose of Private Placement Memorandum (PPM)?: https://www.moschettilaw.com/do-i-need-a-ppm/

Read more about real estate syndication How To Syndicate Real Estate: https://www.moschettilaw.com/how-to-syndicate-real-estate/

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