Mission Matters: Navigating Capital Calls in Multifamily Syndication: Insights from Scott Trench (plus a new opportunity) October 2024

In today’s multifamily syndication landscape, capital calls have become more common, impacting both operators and investors. Recently, Scott Trench, CEO of BiggerPockets, on the Best Ever CRE Show shared his experiences as a limited partner (LP) navigating the complexities of capital calls in syndications that have gone poorly, not due to operator error but market conditions.

Trench, known for his conservative investment approach, has primarily focused on small multifamily assets. However, he ventured into larger multifamily syndications, investing in two deals during the market peak of 2020-2021 at a 3-3.5 cap in Phoenix, Arizona. Like many, those deals resulted in capital calls.

Here’s what Scott Trench shared from his experience, offering LPs valuable guidance for managing capital calls:

1. Do Your Homework

“If you don’t understand the thesis behind the capital call,” Trench advises, “don’t invest.” Ensure you fully grasp the operator’s rationale and projections before committing to additional capital.

2. Treat the Capital Call Like a New Investment

Trench emphasizes the importance of treating capital calls like fresh investments. “Consider what the returns are likely to be on the capital you’re about to invest,” he says. The dilution effect may be significant depending on the structure, but if it’s a new round of preferred equity or another distinct tranche, think of it as a new investment and view prior investments as sunk cost.

3. Focus on Relationships

In syndication, relationships matter. “Someone who’s down today may be up tomorrow,” Trench explains. As an LP, evaluate the operator’s integrity and professionalism. Is this someone who made a bad bet or got unlucky, or is the operator mishandling the situation? Maintaining professionalism and balance is crucial in these situations.

4. Understand the Exit Cap Rate

Finally, Trench highlights the importance of the “exit cap rate”—a critical term that every LP should be familiar with. The exit cap rate refers to the expected cap rate at which a property is sold at the end of the investment period.

• Definition: The exit cap rate is calculated as NOI divided by the expected sale price. It impacts return projections and reflects market conditions.

• Why It Matters: A lower exit cap rate typically means a higher sale price and potentially better returns for investors. Understanding this concept is essential to assess whether a capital call or an ongoing investment makes sense.

Bonus Insight:

“If you don’t instinctively understand how the exit cap rate affects your returns,” Trench says, “you need to go back to the basics before continuing as an investor in this space.”

Final Thoughts

Capital calls are never easy, but they are becoming a more frequent reality in today’s syndication market. Following Scott Trench’s advice can help LPs navigate these challenges with clarity, confidence, and a stronger understanding of the financial landscape.

At Missional Capital Group, we prioritize transparency and conservative, low-risk investments. Our goal is to never have to do a capital call. That is why we approach each investment with caution and conservative underwriting. If you have questions about how we approach risk management, or if you’d like to discuss upcoming opportunities, don’t hesitate to reach out!

-The Missional Team

P.S. We have a verbal agreement for our next acquisition. We can share more information once we are officially under contract.