Declined the capital call, got diluted, and the deal died anyway

$218 to $261 in 14 months is a 20% move and honestly that's not extreme for that window, which is the part that should scare people. It means the sponsor's original number had no escalation allowance in it at all. On my own jobs I now carry escalation as a separate line from contingency, because contingency gets eaten by the surprise in the wall and escalation gets eaten by the calendar. A budget with one line for both is a budget that will call you for more money.

The dilution clause is the whole document. "Punitive rate" covers a lot of ground and I've read versions that convert the shortfall into a preferred loan at 15% ahead of everyone, versions that dilute at 1.5x, and one that simply let the manager reallocate the non-funding member's interest at fair value determined by the manager. That last one is unreviewable in practice. @quill do you remember which formula yours used? It changes what advice this thread should give, because in a 1.5x world your $31k decision cost you differently than in a manager-discretion world.

I'm still picking a lane, so this thread is useful to me. If you had it back, would you have gone into a multi-asset fund at the same $120k, or would you have paid the tax in 2022 and moved on? I can't tell from your last paragraph whether you think the structure failed or the sponsor did.

Adding up the real cost since you were gentle about it. $19k principal, $38k tax due at once, and the $38k was money you'd otherwise have held from 2022 so there's a carrying cost on the part you spent. Plus whatever the $120k would have earned in something dull for two years, call it another $12k at conservative numbers. So the total swing against you is closer to $70k than $57k. Not arguing, just noting that the opportunity cost line is the one people leave out of these writeups.

I'm confused on one mechanical point. When the fund sold the land and sent you money, why did that trigger your deferred gain rather than just being a loss on the fund investment? I thought those were two separate things happening in two separate places.

The failure was diligence on the sponsor. Two conventional projects and no OZ fund history, and the entitlement risk sat entirely on you at a 6% position with no board seat and no consent right over a capital call. I'd have asked for their last three projects' permit application dates against certificate of occupancy dates, which is a document request that takes them an hour and tells you almost everything. If they can't produce it, that's the answer. @quill did you ask for anything like that in 2022?

@canton I don't think sponsor diligence would have saved this. A competent sponsor in that jurisdiction in that window still gets a 14 month entitlement and still gets a 20% escalation. What breaks the position is that there was one asset, no reserve, and a manager who could call capital at will. Same project inside a four-asset fund with a 10% reserve line takes the hit and keeps going. @quill's own conclusion, hold the call amount in cash, is the right lesson from the wrong side of it, because the better fix is not being in a structure that needs it. On the clause, @warrant is right that the formula matters, and I'd add that the definition of "inclusion event" in the operating agreement and the manager's obligation to notify members before a sale that creates one is worth reading. Most agreements I've read give the manager sole discretion on sale timing with no notice obligation at all, which means the tax event lands on your calendar, not yours to schedule.

The line that stuck with me is that you'd spent part of the deferred tax because it felt like money you had. That's not a structure problem or a sponsor problem, and I've done a version of it with a refinance. Deferred tax in a separate account you don't touch, and you treat the balance as somebody else's. Cheap discipline compared to $38k arriving at once.