Capital Calls and Communications

We recently had the opportunity to share some thoughts with Leverage.com on capital calls.  

I have been on the receiving end and sending end of capital calls during my career.  

There can be positive and negative reasons for a capital call. Some are planned and other times not quite planned.

One thing that I tried to convey in the article is that ideally, capital calls do not come as a surprise.   Obviously, we cannot plan for every scenario.  However, you can mitigate the impact of these surprises by following some basic fundamentals, especially in properties with some cash flow, such as setting aside reserves for repairs/capital work, leasing costs, interest expense. Even if the reserves do not cover the full cost, it can reduce the capital call amount.

Regardless of the cash position, consistent communication and transparent reporting can mitigate the impact of surprise.  As an asset manager, are you preparing and sharing budgets and re-forecasts. Are you tracking lease rollover to prepare for a potential drop in revenue and new leasing costs?  If capital is needed to fund leasing costs, are you preparing an analysis that shows the future cash flow and payback.  Is there an exit strategy, such as a refinance or sale that you can present? For development or value add plays with minimal revenue, are you sharing forecasts with investors so that they can manage their own cash flow in preparation for a call?

There are many other examples that can help reduce surprises -in retail for example,  tracking store closures, knowing your co-tenancy clauses, checking in on the activity of the center at different times.  

Of course, you cannot plan for every contingency.  But knowing your asset and its susceptibility to general risk factors can help mitigate the impact of unknowns. Alternatively, awareness of potential opportunities for your asset and your ability to fund and execute those opportunities is equally important, whether that funding is based on cash on hand, loans and yes, capital calls.

When feasible, reserve management is critical - there is always that delicate balance between being too conservative a reserving too much (i.e. reducing distributions) and distributing too much - leaving little cash on hand.  While neither is easy, I have always found it easier to reduce distributions based on a well thought out reserve analysis than to ask investors for money back.

This article is for general information, educational, and entertainment purposes only. Establishing and implementing a strategy for a particular property encompasses many unique factors, and professional advice/services should be sought for that specific transaction or investment.