#320 How a Capital Call Actually Works (And What to Do When You Get One) ft. Peter Kim, MD
In this episode, Dr. Peter Kim breaks down exactly what a capital call is, why so many passive investors are receiving them right now, and what it actually means for your investment. If you’ve ever opened one of those “important update” emails from a sponsor and had no idea what to do next, this one’s for you.
Peter walks through the right questions to ask, how to evaluate your options, and how to make a decision you can actually stand behind. Tune in!
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Episode Highlights
Now, let’s look at what we discussed in this episode:
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The Phone Call That Started It All
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What Is a Capital Call and Why Do Sponsors Send Them
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Why So Many Capital Calls Are Happening Right Now
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What to Ask and How to Evaluate Before You Decide
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Your Two Options and How to Choose Between Them
Here’s a breakdown of how this episode unfolds.
Episode Breakdown
The Phone Call That Started It All
A physician reached out after getting an email from one of her real estate sponsors.
The subject line read something like “Important update on your investment,” and she was expecting news about distributions. What she found instead was a capital call.
The sponsor needed more money from investors to keep the deal alive. She called Peter with a string of questions: Is this normal? Should I send the money? What happens if I don’t?
That call isn’t unusual.
Peter has had versions of that same conversation with multiple physicians over the years, and he’s been on both sides of it. Whether you’ve already received a capital call or you’ve been passively investing for a few years and just haven’t gotten one yet, it’s worth knowing what you’re actually looking at before one lands in your inbox.
The episode sets up around three things: what a capital call actually is, why this particular market has generated so many of them, and how to evaluate your options before you make any moves. Peter is quick to note upfront that his perspective comes from both seats at the table.
He’s been a passive investor who received capital calls, and he’s also been the sponsor who had to send them.
What Is a Capital Call and Why Do Sponsors Send Them
A capital call is when a sponsor goes back to their limited partners and asks for more money beyond what was originally invested.
That’s the simple version. But Peter takes a moment to reframe how most people think about it. A capital call is almost always the last thing a sponsor wants to send. By the time that email goes out, the operator has already stress-tested the numbers, looked at every other option, and had hard conversations with lenders. Asking investors for more money isn’t something anyone does lightly.
That context matters. It doesn’t mean the news is good. It does mean the sponsor is still fighting for the deal rather than walking away from it. And understanding that can change how you approach the situation when it happens to you.
The common triggers for a capital call span a few categories. Bridge loan maturity is one of the most frequent. The short-term debt comes due, and the sponsor needs capital to extend, refinance, or pay it down. Rate cap expirations are another. When sponsors took on floating rate debt, lenders required them to buy rate caps as a form of protection. Those caps are now expiring, and renewing them costs dramatically more than the original ones did.
Peter shares one example where a cap that originally cost around $30,000 came up for renewal at $1.3 million.
There are also unexpected capital expenditures, such as a roof or a repair the inspection missed, rising insurance premiums, inflation-driven renovation costs, and occupancy levels that haven’t hit the projected numbers.
Why So Many Capital Calls Are Happening Right Now
The Federal Reserve raised interest rates 525 basis points between March 2022 and July 2023.
That’s the fastest tightening cycle in roughly 40 years. Most of the real estate deals that are now struggling were underwritten between 2020 and 2022, in a completely different rate environment. Low rates, strong rent growth, and easy access to debt. All of that is gone now, and the deals built around it are feeling it.
The pressure isn’t coming from one bad sponsor or one bad market. It’s across the entire industry. Many of the operators now sending capital calls are experienced people who made reasonable assumptions that the rate environment made impossible to keep.
Value-add multifamily deals in particular were structured around short-term floating rate bridge loans, with the plan to renovate, stabilize, and refinance into long-term fixed debt within a couple of years. When rates rose and property values softened, that refinance became either impossible or required a significant additional equity injection to satisfy lenders.
Rents added more pressure. The strong growth operators had projected either slowed or reversed in many markets as new supply came online, cutting into cash flow and making any favorable refinancing harder to execute. Insurance costs spiked in the South and Southeast. Labor and materials ran over budget.
These weren’t isolated problems. They hit all at once, on deals that didn’t have much room to absorb any one of them, let alone all of them together.
What to Ask and How to Evaluate Before You Decide
When you receive a capital call, Peter is clear: you’re not just deciding whether to send money. You’re making a new investment decision with updated information.
The same diligence you applied when you first got into the deal applies here, adjusted for where things stand today. The size of the ask is your first signal. A 7% ask to renew a rate cap is a different conversation than a 40% ask to restructure debt on a struggling asset. That gap tells you something about the scope of the problem before you’ve read a single word of the memo.
There are four specific questions Peter says investors should get answered before making any decision.
First: what exactly is the money going to be used for? Not a general explanation. Specific line items. If the sponsor can’t tell you where every dollar is going, that’s a red flag.
Second: what does the revised business plan look like? Not just what went wrong, but where is this deal going from here, and does the math actually hold up given today’s market.
Third: what happens if the capital call isn’t fully funded? Does the deal risk default? Could the lender foreclose? Is a sale being considered? Most investors forget to ask this one. Ask it directly.
Fourth: what does the capital call memo itself show you? Look for a specific breakdown of fund use, updated financial projections that reflect current conditions, a realistic exit timeline, and evidence of what the sponsor did to stabilize the deal before sending the request.
A sponsor who is on top of the situation can answer all of those questions clearly. If they can’t, that tells you just as much as the capital call itself does.
Your Two Options and How to Choose Between Them
When all the information is in front of you, you have two choices. You contribute, or you pass.
Peter has done both, and he walks through each honestly. Contributing makes sense when the revised plan holds up under scrutiny, the ask is proportionate to the problem, the asset is fundamentally sound, and the issues are mainly market-driven rather than operational.
When those things line up and the sponsor has a credible plan for the new capital, contributing can be the right call.
Passing is also a legitimate choice, and it’s not the same as giving up. If the numbers don’t work even with new capital, if the sponsor can’t clearly explain the path forward, or if the ask is too large relative to what you can realistically recover, passing may be the better decision.
But passing comes with a cost you should run before you decide. If other limited partners contribute and you don’t, your ownership stake gets diluted. Peter walks through a simple example: a $100,000 investment in a $2 million LP pool gives you a 5% stake. A $400,000 capital call where you decline but others contribute grows the pool to $2.4 million, dropping your stake to about 4.2%.
That’s the real cost of passing, and sometimes it’s still worth it if the deal has no credible future.
The bigger point Peter makes is about how to distinguish between operators. A sponsor who hit a market condition beyond their control, stayed transparent throughout, explored every alternative, came back with a specific plan, and put their own capital in alongside yours is a fundamentally different situation from one who mismanaged the asset, gave vague updates, and can’t explain what changes or why the new money solves anything.
The capital call doesn’t tell you which one you’re dealing with. The quality of the communication, the specificity of the plan, and the operator’s track record leading up to that moment will.
Make the decision with those things in mind, not out of fear or discomfort.
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