Couldn't fund the month 26 capital call. The dilution language did its job.

The rate cap expiring at month 26 on a five year hold is the piece I'd want to have caught. On my own small stuff I've only used fixed debt so I hadn't thought about it, but a cap that expires four years before the business plan ends is a hole you can see from the beginning. Was the cap term disclosed in the offering materials?

Renovation pace 40% behind because turnover was slow. In the rural markets I look at that's just what happens, tenants don't move and you can't renovate an occupied unit. Feels like the model assumed a turnover rate somebody typed in without checking the property's actual history.

So the capital call was optional but saying no cost you more than the call amount. I didn't know that was possible. Is that normal or was this deal unusually harsh?

@rigging from what I've read it's common in some form, and the severity varies a lot between deals. Two to one dilution is on the aggressive end of what I've seen described. Some agreements make it a loan from the participating members at a high rate instead.

The mechanism is worth stating plainly because it catches people who have read a lot of pro formas and never read a dilution clause.

In a syndicated or crowdfunded equity deal, the operating agreement gives the manager some way to raise additional capital when the property needs it. The three common shapes are a pro rata call where non-participants get diluted at some ratio, a call funded as a member loan accruing interest ahead of all equity distributions, and a new preferred class sold to whoever will buy it, which subordinates everything issued before it. Flint's deal used two of those at once. Punitive ratios exist because the manager needs participating investors to actually send money, and the same feature means a small cash decision can permanently reprice a large position.

What this changes about diligence. The offering summary tells you the projected return. The operating agreement tells you the range of outcomes when the projection misses, and the dilution and additional-capital sections are where that range lives. Read them alongside the debt terms, specifically loan maturity, whether the rate floats, and the term of any rate cap or hedge. A cap that expires before the business plan completes is a scheduled decision point, and asking the sponsor in writing what they intend to do at that date is a reasonable question before you fund.

A capital call is also a securities and contract question specific to your documents, so have a securities attorney read the agreement if a position is large enough to matter to you.

On portfolio construction, holding uninvested reserve against equity commitments changes your blended return math. If you keep 10% in cash, your book yields less than the deals do. That's the price of being able to say yes at month 26.

Everyone's on the dilution clause and I'd point at the refinance assumption instead. A plan that returns most of capital at month 30 through a refinance is a plan that depends on values and rates cooperating at one specific moment. You had no control over that moment and neither did the sponsor.

@flint did the sponsor say anything at month 20 or 22, or did the first bad news arrive with the call notice? Trying to understand whether reading the quarterly updates carefully would have given you time to have the cash ready.