Are Additional Capital Calls Usually Mandatory in REPE?

Say you're looking to invest in a long-term (i.e. 7-10yr) deal as an LP.  The property is an early 2000's vintage, with no immediate plans to renovate it. The purchase price is $100. Given the long hold period, it might make sense to put $25 into repositioning the property around year 5. Given this, the GP only raises an initial capital commitment of $100, and depending on where the market is, may need to call additional capital of $25 five years down the road.

What do you think a 'normal' capital call provision would look like under this scenario? Would the additional capital call be mandatory or would it be optional (i.e. no punitive dilution for those who don't contribute to the additional capital call of $25)? Would the future $25 repositioning capital have to be voted on by all members?

I'm looking a deal similar to this and there is no sort of limit/control over how much additional capital the GP could call over the life of the deal and if you don't contribute over your initial commitment, then you face punitive dilution. I don't know much about partnership/JV structures but it seems like there needs to be some mechanism for members to stop unlimited capital calls--whether that's by voting or having the option not to contribute without getting dinged.

 

What I've seen and do is make capital calls optional, but you're diluted if you don't contribute. Not sure how you wouldn't be diluted when more equity is raised and you don't contribute your share. We'll typically try to fund with internal cash flow or debt first, maybe even a loan from the GP and capital call as a last resort unless it was clearly part of the plan and LP's were told to plan for it. Sometimes when capital is needed, it's the only way to raise it, though. 

 
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You're correct. However, it's my understanding that there are two types of dilution (I'm making up the names, they're not official):

1) Pro Rata Dilution - LP's interest is equal to LP's total capital contribution / total capital contributed to the fund, including any additional capital that is raised. From the LP's perspective, this type of dilution is the most favorable.

2) Punitive Dilution - where the LP's interest is diluted at a disproportionate rate (i.e. 1.5x) helping incentivize investors to contribute when there is an additional capital call.

When you've done optional capital calls, do you use the punitive or pro rata dilution for the invests who do not contribute?

 

I'm right there with you. I feel like punitive dilution would be appropriate for capital calls on the initial capital commitment, but if it's for additional capital (beyond what they committed) it seems like it should be pro rata.

 

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