Agreements governing partnerships and limited liability companies that develop, own and operate real estate deal in a variety of ways with the need to raise additional capital. In many cases the general partner or managing member (the sponsor) is given the right to call for capital from the existing members beyond their initial capital contributions. The members may be obligated to contribute capital in response to such a call, in which case they will typically be subject to various penalties if they fail to make their required contribution (including personal liability, punitive dilution, subordination to the additional advances of those who did contribute, right on the part of contributing parties to fund shortfalls as loans bearing a default interest rate, and/or loss of governance rights).
Often additional capital contribution obligations will be subject to a cap or may be limited to the early years of the venture. Such obligations may also be limited to certain specified purposes (such as to cover property taxes, insurance costs or scheduled debt service). Alternatively, capital contributions may be optional, with the additional equity of those who elect to contribute diluting that of the other members (or being treated as a loan or priority capital) but on a non-punitive basis.
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