Declined the capital call and got diluted to about 40 percent of my position
Writing this up because I was the person who thought reading the pitch deck twice counted as diligence.
End of 2021 I put $50k into an LP interest in a 312 unit value-add in a Sun Belt metro. Sponsor's fifth deal, good track record on the earlier ones, projected 16 percent IRR, 6 percent preferred distributions paid monthly. I liked the story: below replacement cost, rents moving, a renovation program with real before-and-after photos.
The debt was floating over an index with a rate cap. The loan ran three years plus extensions. The cap ran two. I did not notice that gap, and it was in the offering documents in plain language on page 40-something.
What actually happened, step by step. Distributions paid at about 5 percent for 14 months, then stopped. Rents in the submarket flattened as deliveries hit, so the renovated units leased at maybe half the projected premium. Coverage at the in-place NOI was under 1.0 from day one and was being carried by an interest reserve, which I also did not understand at the time. Reserve drained. Cap expired and a replacement cap cost several times what the original one did. Sponsor called capital, my share was $9,400, and the stated use was the new cap plus an interest reserve top-up.
I didn't fund it. The operating agreement let the funding partners take a preferred position ahead of everyone, and my economics are now roughly 40 percent of what they were. Last statement marks the equity somewhere around 25 cents on the dollar. It's not gone. It's also not coming back on the original timeline, and nobody is pretending otherwise.
What I'd do differently. I'd read the loan summary before the returns page, and check the cap term against the loan term and the business plan term. I'd size the deal on in-place NOI and ask what the coverage looks like without an interest reserve. I'd ask, in writing, what happens to my position if I don't fund a call, because that mechanic is the one that actually cost me. And I'd have put $50k across two vintages instead of all of it into a single peak-pricing entry.