“To DO or Not to DO”?

 

Introduction

 

It finally happened; you have received the dreaded email from the sponsor letting you know that the deal in which you have invested your hard-earned money as a limited partner now requires additional capital to keep it afloat. It’s normal in this circumstance to feel taken advantage of, betrayed, and, in some ways, unprotected and exposed. It’s also not uncommon to feel unadulterated emotion when your stomach drops, knowing that the $25,000, $50,000, or more that you invested in this deal might now be at risk. This was supposed to be an investment that was supposed to make money and provide passive income on your path to financial independence. Your first thought might be to never invest in these types of alternative investments again, and that would not be an uncommon reaction. However, just like any of these unexpected events in life, it often makes sense to take a step back, take a few deep breaths, and think this through before emotionally reacting.

 

Just to clarify, there are “planned capital calls” and “unplanned capital calls”. Planned capital calls are when you elect to invest in a deal or a fund and your capital has not been called yet. This type of scenario is common in real estate fund investing or new development opportunities. Conversely, for the sake of this discussion, we will be talking more about the “unplanned capital calls” that often occur due to changes in deal dynamics and/or finances, and in the more common scenario, these deals that are experiencing distress.

 

Unplanned capital calls are something we, as passive investors, never want to be a part of and are often something that many passive investors are not familiar with. We have put together this guide in an effort to guide both the mindset and the decision-making process as to what key variables to consider. The obvious typical disclaimer is that this is not investment or financial advice and coordinate with your own financial and tax advisors, who know your circumstances better than I do. We at Passiveadvantage.com produce content and education for limited partners, as well as develop tools to help guide investments so that you might be less likely to receive this kind of call. However, if this unfortunate circumstance occurs to you, this article gives you some of the considerations when you’re evaluating a deal and whether to contribute additional capital via a capital call.

 

To take a step back, real estate syndication investing offers passive investors a chance to participate in lucrative real estate deals without the responsibilities of active management. As a passive syndication investor, you invest a portion of the deal that will be applied to the equity component (as opposed to debt in this circumstance), and in exchange, you receive a return or a portion of the profit from the deal, often in the form of tax-advantaged income from that deal. This comes in the way most commonly as a preferred return, combined with a promotion or split where the sponsor and the limited partner split the remainder of the profit of the deal. The trade-off of this type of passive investment is that you have very minimal liquidity, In addition, as a limited partner, once you make your investment, you lose any control over the deal. Thus, all day-to-day operations and management are out of your hands. There are some benefits to this lack of control in that you don’t have to spend your time doing those things that are required to enact the business plan and execute a successful deal. In addition, you are not liable for any legal ramifications that might take place at the property or on the property itself.

 

From a return standpoint, the reason many passive investors consider incorporating these types of deals into an overall portfolio in many cases is in conjunction with typical equity/stock market investments. It offers many investors the benefits of additional compounding that we typically would not find in traditional stock market investing. Over time, for those investors who make multiple investments in syndications, one can more quickly scale their passive income and shorten their path to financial independence. In addition, due to some of those limitations, such as lack of control and limited liquidity, there is often a premium on the rate of return that one has the potential for in these deals compared with other options such as Treasury bonds and traditional equity or stock market investing. However, with that increased return premium also comes the cost of more risk. Although admittedly, over the last 5 to 10 years, that risk was easy to forget about as a passive investor, where it had been the norm to get great returns with early exits in many deals. However, now that risk premium that was always there has reared its head once again as it eventually does every cycle with many investors having deals they’re invested in, pausing distributions, or worst-case, requesting capital call requests or even loss of capital altogether.

A crucial aspect of this investment model that you hope to not have to learn about firsthand is a capital call, where investors are asked or required to contribute additional funds beyond their initial investment. Evaluating these capital calls is essential for passive investors to make informed decisions and maximize returns while managing risks effectively.

 

 

 

Capital Call: What is it? Why now?

 

A capital call is a request from the GP (General Partners/Syndicator) to the LPs (Limited Partners) for additional funds beyond their initial investment. These calls usually occur when the syndicated property requires additional capital for various reasons, such as unexpected repairs, renovations, or a change in debt structure or interest rate.  These days, the most common reason why properties require a capital call is due to the rapid and aggressive increase in interest rates by the Federal Reserve in the short period over the last year or so.  Many sponsors were using short-term bridge loans to enact their value-add plans, where they would take a short-term loan with a variable rate that would eventually reset. The plan was to renovate properties during the period that the low-rate loan was fixed and then sell or refinance before that loan rate expired.  What was not accounted for was how rapidly and drastically the Federal Reserve decided to increase interest rates to combat inflation, and this left many sponsors in the lurch. Even if the loan was not coming due, many lenders require an escrow for any upcoming rate cap extensions, thus, as the cost of rate caps on these variable loans skyrocketed, this unexpected expense ate into the cash flow and operating reserves of a deal.  The few deals that were cash flow positive would have been able to refinance, or those deals that already had fixed rate debt in place were in the catbird position.  Unfortunately, a large number of those deals had the aforementioned interest rate cap, which keeps the amount that the rate can exceed the initial rate to a maximum percentage, often based on a fixed index such as SOFR. Many of those rate caps already have or are set to expire over the next 12 to 18 months in 2024 and 2025.  Thus, to make it simplistic, the cost of debt for these properties far surpasses what the projection was initially, making many of these properties negative from a net operating income (NOI) standpoint.  There are mandatory capital calls and optional capital calls, which are fairly self-explanatory. This is a situation as a limited partner where you need to dig into the private placement memorandum and be sure exactly what the dynamics and structure of how capital calls could be instituted by your sponsor.

 

 

Most Common Indications for an Unplanned Capital Call

 

Debt-Related Capital Call  

By far the most common reasons we are seeing capital calls these days are because of the rapid and unprecedented increase in interest rates.  Many of those sponsors who used short-term, or bridge debt, with a floating interest rate are now being required to creatively manage the increased debt expense. The appeal at the time for sponsors using a value-add plan in a real estate syndication was that in many cases you could get up to 80% leverage on these deals, therefore requiring sponsors to raise only 20% equity. From a return perspective to LP’s and sponsors, the more leverage on a deal, the more opportunity for an outsized return.  There is a give-and-take seesaw balance in many deals in that when kicking up the leverage, it improves the LP returns, but conversely, it also adds additional risk.  Debt is by far one of the biggest controllable risk variables when underwriting a real estate deal, and this is why so many lenders require a particular threshold for a debt service coverage ratio (DSCR).  As was stated, much of the risk in the current market is related to the fact that these loans in trouble were for short-term periods, typically three years with the ability to add on two one-year extension options.  Often, in those additional extension years, the rate went to a variable component, which with the rapid rise in interest rate left many sponsors in the lurch.

 

This “variable rate” was common practice when things were going well over the last 3 to 5 years, and many sponsors that wanted to add on some risk mitigation strategy purchased what is called a rate cap. When times were good these rate caps were very affordable, however, in these new times, rate caps went up, in some cases 100 to 1000 times the cost of what they were when initially underwriting the deal. In some cases, even if a rate cap is not due as of yet, due to the increased cost of rate caps, many lending banks require an updated rate cap escrow, which significantly increases the cost of debt, which eats into property cash flow and ultimately NOI. For those deals looking to refinance into fixed-rate debt, there is often a DSCR requirement, which due to decreasing NOI may be tough to meet without injecting additional capital into the deal. It is estimated that at least 25% or more of the current multifamily deals that are coming up with a rate cap expiration will not qualify for the ability to refinance. This is a staggering number, and this is what led to much of the news headlines we hear about the upcoming crash in multifamily. For these deals that might be underwater or not meet the DSCR requirements to refinance, they would need to bring cash to the table to qualify for the refinance. This is called “cash-in refinance,” where the sponsor is attempting to refinance into a new more affordable fixed-rate loan, typically out of a variable rate or bridge loan, to stabilize the debt cost on the property. These cash-in refinances can have nuances that you need to be aware of. Some questions to consider are: Is the Refi term into a new fixed rate loan, or is it simply an extension where the new loan terms are only for one year as a “new bridge loan” per se? You need to ask if this money is simply being used to extend or to get a new rate cap, which typically would be for an extra year only to find ourselves in the same position a year from now. These two loan dynamics of a refinance have very different implications and prospects for a successful outcome for an LP. Thus, in essence, you need to know how much time this takes to close the deal, and that is a big factor in the potential ability of the sponsor to turn the deal around. For more detail, we have a debt article here that explains some of these nuances.

 

 

 

Unforeseen Expenses  

Separate from debt issues in the current real estate market, another unexpected factor that has a large impact on the deal dynamics is inaccurately projecting expenses during initial underwriting or not accounting for unexpected costs.  This can come in the way of insurance-related costs (in particular in FL and TX), as well as possibly new property tax reassessment projections.  In some cases, the additional costs come in the form of increased cost of labor and materials to accomplish renovations and the value-add plan can also eat into the bottom line of the deal.

 

 

 

Cash-Flow Shortfall

For any of the reasons above, many deals could be falling short on operating cash flow, and this can be a huge red flag in some of these deals.  Quite simply, the cash flow from the deal is the difference between net operating income versus the total expenses. This cash flow is what makes the project profitable and gives it a cushion during times of upheaval. Often, when we are evaluating a capital call, we will consider what the “Path to Cashflow” of this property and how realistic is it.  This cash flow shortfall could be due to either increased expenses, decreased income, or both. Ultimately, either of these scenarios will affect the net operating income of a property and its bottom line. For example, although this is not common in the current real estate distress if there is a significant drop in occupancy it could affect the operating income of the property. Another example is whether there was a significant weather event with down units or a severe crime on the property that may affect the desirability of the property for its tenants.  Ironically, in this day and age, occupancy is fairly high, and that hasn’t been one of the driving forces to the current real estate distress that we’re witnessing. These different types of property challenges require careful inspection by the LP when deciding as a limited partner whether to inject additional capital into a deal, as it is a common scenario of “good money after bad” and the need to be diligent as to the use of added capital and if it will have an impact.

 

 

 

 

Key Factors to Evaluate Capital Calls

 

1. Look Within

The first step to many of these decisions, whether they be in life or investing, is to look within yourself as to what your expectations are and where you are at this juncture in your life. That is, you need to honestly assess where you are both mentally and financially as to whether you are in a position to take on this additional risk of a capital call. When evaluating a capital call, one must look at these deals through the lens of a brand-new investment decision, even though you have already made one at the start.  Now the deal dynamics have changed, and you need to take a new look as to whether this deal still appeals to you and still seems like a profitable business plan. However, if you are at a point in your life or at this moment in time where you have minimal liquidity or are at a point where you don’t want to take on any additional risk, in that case, you may choose to pass on the contribution of additional capital. The liquidity component is key in that it’s not usually recommended to scramble together money or borrow money that you can’t afford to lose when investing in these types of capital calls.  If you happen to have money sitting on the sidelines or money earmarked for real estate investing it might be a different consideration.

 

 

2. Sponsor Bussiness plan “The Second Act” One-on-One with the Sponsor

Although you need to understand the business plan at the start of any syndication investment and whether it matches up with your goals and risk profiles, now it’s even more important when considering contributing extra capital in the form of a capital call. You need to get down to the nitty-gritty with a sponsor, and they should be willing and able to devote time to your questions and inquiries. I would go as far as to say it would be appropriate for you to ask for a personal phone call with a sponsor to discuss some of the questions you have. The first question should be: has the sponsor ever experienced a capital call? And if so, how did they navigate it in the past? You need to get into specific metrics, such as, What specifically will your new capital be used for? Whether it is a brand-new investment or deciding on the capital call the most important factor in any of these deals always comes down to the sponsor and the team. You then need to assess both how they respond to your questions and what the answer is about the usage of new capital to get a feel for their grasp on the utility and use of this additional money. If it does not appear that this money will save this deal, then you might be throwing good money after bad and it’s something you may want to pass on. Ask the sponsor to reaffirm to you the investment objectives and the business plan and how this additional capital will help, specifically in detail. Even more so than when you’re investing in a new deal, my feeling is that the onus is on the sponsor who needs to re-sell you on the deal now more than ever.

 

For example, if they plan to use this money to refinance the deal into a fixed-rate debt that, after being implemented, will then bring the property back to positive cash flow, that would be a reasonable thesis.  If the money is needed for construction or labor costs to help renovate additional units to bring more units up to the market rent that was expected in a deal, once again, to make the deal cash flow positive that might be reasonable. Other considerations would be whether or not the factors that affected the capital call or within or outside of the sponsor’s control.  In circumstances where the sponsor could’ve foreseen these possible difficulties at the deal’s outset, it may portend less confidence in that sponsor’s preparation and their underwriting criteria.

 

Lastly, you should ask the sponsor directly what they are doing personally to help keep this deal afloat. In the same sense as when you’re looking at a deal from the start, you want to see “skin in the game” from the sponsor and that is an even more fair question at this stage as well. Is the sponsor coming out of their pocket with an additional financial commitment themselves, just like they’re asking you to keep this deal afloat, and if so, how much? While the deal is underperforming, are they pausing their asset management fees during this time? As an investor, you need to know what the sacrifices are that the sponsor is making to keep this deal afloat, and that gives you an idea of their commitment to the deal if they put their money where their mouth is. Is the sponsor offering some form of concession to investors for participating in the capital call? This may be in the form of an investor-friendly increased preferred return or a more favorable reduced split or promotion on the capital call money once the deal sells. The key takeaway is that a good sponsor should be willing to offer some type of olive branch to investors in acknowledgement of the situation and the investor taking on additional risk. 

 

 

3. Sponsor Transparency and Communication

At Passiveadvantage.com we harp on the fact that sponsor communication is a key parameter to scrutinize when evaluating a passive syndication opportunity, not only because it is good to stay abreast of the property but also because it gives insight into how that sponsor values its limited partners.  One needs to assess the GP’s communication practices both before an initial investment, and even more so now regarding the unexpected capital call.  Has the sponsor been keeping you abreast of the possibility of a capital call and the difficulty at the property level, or did the capital call email come out of the blue and was completely unexpected?  

 

This next variable I will discuss is fairly nuanced, but it comes down to human nature and how it relates to sponsor communication. Generally, you can get a feel for someone’s true feelings in all social interactions more accurately by paying more attention to how they act and not what they say. It is human nature when there is impending doom to try to avoid those situations, and understanding human behavior gives one insight into someone’s true feelings regarding the interaction and how they project the outcome.  Thus, if I feel that leading up to the deal as well as around this capital call, the sponsor’s communication has been poor, that generally tells me the sponsor’s true feelings on this deal and its true potential to be turned around.  Does the sponsor seem reactionary or defensive?  Do they stop answering questions and emails? These are red flags when deciding whether to contribute additional capital to a deal.

 

Sponsors with deals in trouble better be “over-communicating,”  hosting webinars and Q&A sessions with LPs to explain the capital call and the plans for the additional funding.  Once again, I fully admit that this is a nuanced perception, but in my experience, both with myself and helping other investors, this is often the case. In many of these deals’ sponsors will stop or pause distributions before asking for a capital call. You can get a preview or a hint as to how they will handle capital call preparation based on how they went about announcing to their limited partners that distributions were going to be paused or halted and what the communication was around that process leading up to the capital call. If the sponsor has been forthcoming and almost pre-warning as to what is to come but also open to how they’re going to turn the deal around, then I am much more confident in that sponsor and the use of my additional capital to contribute to the deal. Transparent communication is vital for keeping investors informed about the reasons behind the call and the expected outcomes.  Look for regular updates on property performance, market conditions, and any changes in the investment strategy that might impact future capital calls.

 

 

4. Property Level and Limited Partner Financial Analysis

The next step is to analyze the capital call as a new and distinct investment because, in essence, that is exactly what it is. In the big picture, as a limited partner, you need to ask yourself what the “path to cash flow” of this property is.  To do that, it comes down to a basic calculation between the expenses and the income and how that will ultimately affect the net operating income (NOI) at the property level.  Just like you would in an initial investment, you need to ask the sponsor how the injection of this cash will impact the break-even occupancy of the deal. Break-even occupancy (BEO), is an important metric to understand as to how much room or headway the deal has and to where I could still be successful. You need to know what that BEO number is now versus what it will be after the capital injection, and how this new capital will help that number in the future.

 

You need to understand the trend line for the revenue of the property which typically comes in the form of either higher market rent rates or higher occupancy. What is the current rent rate of the property compared with nearby properties, and what are the averages for that geographic area? This is information that can readily be found online concerning rent rates in that area, and you can compare that with what the sponsor is projecting the new rates to be. In many cases, in this current real estate market, occupancy has not suffered, and many properties are already at high 90% occupancy rates; therefore, that lever cannot be pulled. Thus, in many cases, you need to either increase your rent rate typically in the form of value-added improvements, or decrease expenses, which often come in the form of a decreased cost of debt, but could also be insurance, taxes, etc. It’s important to understand how these levers and pushing and pulling them can affect the ultimate income of the property, which is the deciding factor as to whether or not the property stays afloat.

 

Separately, you need to crunch the numbers to be sure that the new plan that the additional capital will be used for makes financial sense. This needs to be evaluated on a deal-by-deal basis since many different options might lead to distress, which would require a capital call. Piggybacking on a prior point, the sponsor needs to be crystal clear as to how this new capital will impact the deal and turn around the reason for its current difficulty or shortfall. This discussion should not be overly complicated, and if the sponsor cannot outline the investment plan, that serves as a red flag. A key thing to discuss with the sponsor is to compare the original business plan to the actual performance and then determine why the underwriting at the start fell short. What was the miscalculation that led to the performance falling off track? What is the distress point that the deal encountered? Is this something that the sponsor could have predicted and may have miscalculated when initially underwriting the deal? This discussion with the sponsor is key when assigning culpability as to what the distress point was in the deal.

 

 

5. Exit Strategy

To get an idea of the forward-thinking nature of the sponsor and how detailed they are in the analysis and reasoning behind the capital call, you need to be informed of this new exit strategy. Ask the sponsor what the goal of the capital call is and how this leads to a plausible exit strategy.  For example, is the capital to refinance the deal and stabilize the debt to eventually sell, or is it simply to create reserves since the property is in a position of negative cash flow?

 

In the case of a refinance being the goal of the injection of additional capital, many of these refinances will be parlayed into a fixed-rate loan, which is typically an agency loan that includes Fannie Mae and Freddie Mac. Many of these agency loans need a debt service coverage ratio (DSCR) of at least 1.25 or more. This means that there needs to be a 25% cushion in the net operating income versus what the cost to maintain the property is. In addition, agency lenders also like to see new LTV loan-to-value in the range of 60–65% right now, which can make it very difficult to qualify for a refinance without a significant cash injection into the deal. These two example scenarios are very different in the desirability of whether a limited partner should contribute additional capital to the deal. Thus, from the big picture standpoint, a limited partner in general can get an idea of the risk assessment or the likelihood that the deal will be able to be turned around and ultimately exit successfully based on the higher the debt service coverage ratio and the lower the LTV, which both would give the sponsor a better chance of finding refinance options. Lastly, you need to ask the sponsor what happens in the event the capital call is not funded or a refinance is not achieved. How would that impact this new exit strategy?

 

 

6. Risk Assessment

As a limited partner, you need to evaluate the risks associated with the capital call, such as liquidity risk and the possibility of a need for future calls. When assessing financial risk, one must compare it with what the alternative is in the current market. In this current market environment with Treasury bills and money market accounts offering a 4.5 to 5% rate of return, one needs to compare what the additional capital contribution would offer versus this base “safe” return and what the delta is to what the new return opportunities might be. Just as discussed above, you need to have a candid conversation with the sponsor about what the potential is for future capital calls to get an assessment as to what the likelihood is that more money will be asked for from a financial commitment standpoint. From a big-picture perspective, you want to consider the impact of possible future recessions or economic downturns, market fluctuations, or unforeseen events on the property’s performance and the syndication’s ability to meet its financial obligations.

 

 

7. Market Assessment

Just as you should have a thorough evaluation of the market when deciding on an initial investment, you should now reassess these market dynamics when evaluating a property and the capital call opportunity. If it has been some time since the initial investment was made, you need to re-calibrate as to whether this market still offers opportunity from an investment standpoint and if the favorable market thesis still exists. There are several metrics we preach when evaluating a market here at Passiveadvantage.com, and some of those include population growth, job growth, average income versus rent cost, the ratio of buying a home to renting a home, and overall, just general inward migration to the area, and whether or not this market still offers metrics in those dynamics that make sense. Is this market still growing and on the path to progress, or has it fizzled out?

 

 

8. Analyze the Existing Capital Stack and How it May Change

Another key variable we scrutinize at passiveadvantage.com is analyzing the capital stack in detail from the start when evaluating a syndication opportunity, but this becomes even more important when deciding as a limited partner to contribute additional capital to a deal. The capital stack refers to the layers of capital that go into purchasing and operating a commercial real estate investment. It outlines who will receive the income and profits generated by the property and in what order. This could include senior debt, mezzanine debt, preferred equity, common equity, etc.

 

 

Source: Crowdstreet.com

 

 

Is the capital stack extra complicated with multiple levels of debt and equity before the common equity/LP shares? Some of these added layers also include different class structures or tiers of LP equity within the deal, such as Class A shares, Class B shares, etc. Is there preferred equity or preferred debt in the deal? Is there Mezzanine debt? Without getting too much into the weeds, if there is mezzanine debt or pref debt within the deal, in essence, that adds on to the loan value, thus getting a loan of 70% LTV and 10% pref equity is technically an overall 80% LTV increasing the risk of the deal.

 

There are even subcategories of preferred equity or debt in how they are structured, for example, where it is either “hard pay debt” or “soft pay debt”.  Another example is if the Pref equity partner is not getting paid the agreed-upon amount, say 6 to 8% monthly, they can then have the rights if it’s a hard pay structure, to fire the manager or the sponsor and take over the deal. In many cases, that might mean that this Pref equity partner can force the sale of the property prematurely, which could potentially wipe out limited partners’ capital if the profit on the deal is thin.

 

Therefore, in deals that contain pref equity or mezzanine debt, you want to be sure to understand the dynamics of how much control they have over the deal. You need to understand exactly where your investment sits in the capital stack, In that sense, often, as a limited partner, your “common equity” sits in the lowest or last priority position on the capital stack. Thus, the number of layers or components of the capital stack ahead of the common equity has a direct effect on your likelihood of receiving the projected return. In the scenario where a deal is spread thin to remain profitable, the more profitable the deal needs to be for you as a limited partner to get a fair return. In addition, aside from just the number of categories ahead of the limited partner in the capital stack, one must also look at the specific percentages of each of those categories as well. Obviously, the larger the percentage of ownership that precedes the common equity share, the higher up (less priority) you have as cash flow is distributed.

 

Lastly, you need to understand, based on the new sources of the capital call, how the capital stack will or won’t change post-capital call money injection into the deal. In many cases, the existing limited partner equity in the deal may become subordinate to a new member loan or fresh capital being contributed via preferred equity or mezzanine debt, as these new funding sources are typically compensated more favorably for taking on the additional risk than there was at the start of the deal. These concepts are often referred to as what it would take to “clear the capital stack”, which in essence means going through the order of preference of partners before it gets the limited partner or common equity.

 

Separately, if investors choose not to invest in a capital call, then they may experience what’s called dilution. Understand that if the dilution outlined in the operating agreement is a 1:1 dilution, LP equity is recalculated via the new ratio considering the additional capital. In some deals, the dilution may not be 1:1, and you may have a greater penalty if you do not participate in the capital call. You need to look at the nuances of this dilution component of the capital call and how that might affect your choice not to invest. This concept of limited partner dilution is discussed more in the next section.

 

 

9. Limited Partner Dilution: Legal and Regulatory Considerations

We at Passiveadvantage.com preach a thorough and detailed evaluation of all real estate operating agreements, or PPM, before investing in a deal. We have tools and education materials to help with that if you want to learn more, but generally, there are certain key components that we look at, one of them being a section called “capital call provisions”.

 

One needs to pay close attention to the capital call provisions within a private placement memorandum or operating agreement. In some cases, these provisions may limit the amount of capital call that can be asked for from a limited partner, say 5% of the initial investment, for example. Often, if a limited partner does not choose to invest additional capital, some dilution provisions would occur, and the typical percentage of ownership in a deal for that investor might then become less for anyone who chooses not to add the additional capital that has been requested by the sponsor.

 

Another similar but different scenario would be that if a limited partner chooses not to invest, there is a loss of equity. It should be noted that “loss of equity” is different from being diluted, where with dilution the investor’s stake remains the same but it is a smaller proportionate share. For those choosing not to invest, another possible outcome would be called “loss of distributions”, whereas for those limited partners that choose to not comply with the capital call, they would then lose all or some of their future distributions.

 

If the financial requirement cannot be met by the limited partner’s injection of capital, then the sponsor may search out additional money in the form of a loan that must be repaid. This loan can come from an outside bank or lender, or it may come from the sponsor or the partnership team itself. In many cases, these loans may have high interest rates, and any distributions that the partner is eligible for are instead used to pay down the balance of the loan first. This additional capital in the form of a loan or equity, resizes the ownership pie or structure of the original aka. Dilution. Conversely, a member loan does not dilute ownership but rather inserts a new form of capital that is subordinate to the senior loan but has priority over the common equity. In other words, member loans can “skip in line” in front of equity in terms of repayment priority where the partnership swaps equity for debt until the debt is repaid. Alternatively, if a significant gap in funding remains, then sponsors will typically seek capital from outside third-party providers (i.e., preferred equity or rescue capital). You need to understand the specifics within the ppm as to how these details are handled from a dilution standpoint to those limited partners.

 

 

Example Capital Call Dilution

“If all failed capital contributions are not funded by contributing members, the manager shall be permitted to fund such remaining failed capital contributions by obtaining a loan to the company or its subsidiaries or by raising additional equity in the company.” On the day following the Funding Due Date, the Percentage Interests of the Members shall be adjusted in the following manner: each Member’s Percentage Interest shall be the percentile equivalent of a fraction the numerator of which shall be the total amount of capital contributions made by such Member through and including the Funding Due Date (including any portions of any failed capital contributions funded by such Member) and the denominator of which shall be the total amount of capital contributions made by all of the Members through and including the Funding Due Date (including any portions of any failed capital contributions funded by the Members).”

In this case, the total capital invested and the amount you invested are reassessed to determine where the investor gets a new percentage of ownership. This is a fairly standard dilution language and a simple calculation. If the percentage of capital called as a component of equity already funded into the deal is small, your dilution won’t be material. However, if it is a significant capital call that is close to the original equity, then that equation changes significantly. Although this is a somewhat common verbiage for a capital call, there are certain other capital call agreements or verbiage that are much more punitive, so you need to carefully review this and may find it appropriate to obtain legal representation to help. 

To further this point, investors who do not provide additional capital may find their ownership share of the limited partnership diluted. This can happen in two common ways:

 

 

1. Standard Dilution

To understand a standard dilution, consider a hypothetical example where you, as a limited partner, have invested $50,000 in a deal. The sponsor’s capital call requests 20% of the original equity or $10,000 for your share. If you decide not to contribute this amount, your equity share will be diluted by 17%.

 

$50,000/$60,000 = 83% (or 17% dilution)

 

Essentially, if you do not contribute to the capital call and other investors choose to contribute, you now own the same dollar amount of a new larger pie, which, by default, means you own a smaller percentage.

 

2. Punitive Dilution

In some cases, non-contributing investors can be further penalized by the sponsor through additional or what’s called a “punitive” dilution, over and above standard dilution.

 

Consider the same example as above, but now use a 1.5-times punitive dilution provision. For non-contributing members, the punitive dilution is then calculated in two steps. First, the amount called is multiplied by 1.5 ($10,000 x 1.5 = $15,000). The difference ($15,000 minus $10,000 = $5,000) is then deducted from the original equity contribution of $50,000 to determine the punitive dilution percentage.

 

$45,000/$60,000 = 75% (or 25% dilution)

 

If you decide not to contribute in this scenario, your equity share would be diluted by 25%, as compared to 17% in the simple dilution scenario. That difference (8%) is allocated to the investor(s) who contribute(s) on behalf of the non-contributing member.

 

 

Using Additional Funds via Capital Call as a Loan

To expand on a prior scenario, in certain cases, instead of the capital call contribution affecting the equity ownership in the deal and possibly diluting those who choose not to invest, there are other ways that this additional capital contribution can be handled. One of those scenarios is when a sponsor opts for what’s often called a “loan remedy,” whereby they convert up to all of the capital into a loan. The details, including repayment and interest on any potential loans, are laid out in the operating agreement.

 

As is typically the case with debt, a member loan would be paid off (with interest) first before any potential proceeds are paid to equity holders. These loans sometimes come with an option for contributing investors (or for the sponsor) to fund on behalf of non-contributing investors, providing those who participate an opportunity to “step in” and take on more than their current pro rata share of this loan.

 

Why would a sponsor choose to convert the requested capital into a loan? Often, this option can potentially provide a fast and simple solution for a sponsor to fund the capital call. Additionally, instead of punitively diluting non-contributing investors, a loan remedy can provide a viable solution to meet short-term capital needs, such as funding a closing on a refinance. Ultimately, since this loan would have to be paid back first before any distributions, it still penalizes those original equity holders; however, the penalty would be equal and less tangible.

 

 

Loss of Capital – Tax Implications

Typical disclaimer: although I am not a CPA or accountant, it goes without saying you need to discuss the discussion with your tax professionals. However, I will speak in general terms, although everyone’s situation is different. Say all the above discussions go wrong and ultimately you lose all of your originally invested capital on a deal. What can you do to try to make the best of that bad situation? When investing in a typical syndication, it is common to receive passive losses by way of bonus depreciation throughout the time of the deal. For most people, these passive losses can only offset passive income within a syndication or across several syndications. This is typically referred to as passive loss limitation in defining what can be offset by passive losses. In the event of a complete loss of capital at the time of a deal dissolution, there can be nuances that change that limitation. In certain circumstances, these losses can then be used to offset W-2 income even if you are not a real estate professional and even if you are not active in the deal. However, there are certain circumstances where you may even receive a penalty or be required to pay in situations where you receive bonus depreciation on a deal, some or all of it may be required to be paid back at the time of the dissolution. Once again, this is extremely nuanced and personal, and something to reach out to your CPA about if you were in the unfortunate circumstance that something like this occurred with your investment.

 

 

 

Conclusion

 

Now more than ever, it is critically important for limited partners to be fully aware of the many factors and dynamics that go into evaluating an unplanned capital call. As outlined above, it requires a thorough analysis of project performance, the purpose behind the call, the sponsor’s communication strategy and exit plan, and ultimately the likelihood of achieving a positive outcome. Tools such as our LP Deal Analyzer are designed to point out deal weak points or risks in a particular deal before investing. However, many of the same metrics we emphasize are still in play when deciding whether to add additional capital to a given deal in the event of that unwanted email asking for a capital call. Our ultimate hope is that this article, along with the many resources we offer at Passiveadvantage.com, gives limited partners the ability to prepare when considering these real estate syndication investments in the unfortunate scenario where we are required to contribute additional capital. After conducting your due diligence and considering all relevant factors, make an informed decision about whether to participate in the capital call. Remember that your decision should align with your investment objectives, risk tolerance, and overall financial strategy. Lastly, we always recommend seeking advice from financial advisors or legal professionals to help.

 

 

 

Disclaimer

 

This article is for informational purposes only and is not a recommendation or offer to buy or sell securities. This content is intended for accredited investors only. Information herein may include forward-looking statements and is for informational purposes only. Forward-looking statements, hypothetical information or calculations, financial estimates, and targeted returns are inherently uncertain. Past performance is never indicative of future performance. Advice from a securities professional is strongly advised, and we recommend that you consult with a financial advisor, attorney, accountant, and any other professional who can help you understand and assess the risks and tax consequences associated with any real estate investment. All real estate investments are speculative and involve substantial risk, and there can be no assurance that any investor will not suffer significant losses. A loss of part or all of the principal value of a real estate investment may occur. All prospective investors should not invest unless such prospective investors can readily bear the consequences of such a loss.

About the Author

sam

Dr. Sam Giordano has been a practicing physician at an academic medical center for ten-plus years and has had consecutive designations as a “Top Doctor” in his geographic region. He has also published multiple manuscripts in peer-reviewed journals. He has an avid interest in personal finance and financial education and has formed a personal finance teaching curriculum for residents and fellows at his hospital. He is also an assistant professor at the associated medical school for his hospital. He began exploring real estate investing in 2017 and has now invested in multiple passive syndication deals as a limited partner. 

Privacy Policy

Last updated: June 27, 2021

This Privacy Policy describes Our policies and procedures on the collection, use and disclosure of Your information when You use the Service and tells You about Your privacy rights and how the law protects You.
We use Your Personal data to provide and improve the Service. By using the Service, You agree to the collection and use of information in accordance with this Privacy Policy. This Privacy Policy has been created with the help of the Privacy Policy Generator.

Interpretation and Definitions

Interpretation

The words of which the initial letter is capitalized have meanings defined under the following conditions. The following definitions shall have the same meaning regardless of whether they appear in singular or in plural.

Definitions

For the purposes of this Privacy Policy:
  • Account means a unique account created for You to access our Service or parts of our Service.
  • Company (referred to as either “the Company”, “We”, “Us” or “Our” in this Agreement) refers to Passive Advantage LLC, 1201 N. Orange Street, Suite 600; Wilmington DE 19801.
  • Cookies are small files that are placed on Your computer, mobile device or any other device by a website, containing the details of Your browsing history on that website among its many uses.
  • Country refers to: Delaware, United States
  • Device means any device that can access the Service such as a computer, a cellphone or a digital tablet.
  • Personal Data is any information that relates to an identified or identifiable individual.
  • Service refers to the Website.
  • Service refers to the Website.
  • Service Provider means any natural or legal person who processes the data on behalf of the Company. It refers to third-party companies or individuals employed by the Company to facilitate the Service, to provide the Service on behalf of the Company, to perform services related to the Service or to assist the Company in analyzing how the Service is used.
  • Third-party Social Media Service refers to any website or any social network website through which a User can log in or create an account to use the Service.
  • Usage Data refers to data collected automatically, either generated by the use of the Service or from the Service infrastructure itself (for example, the duration of a page visit).
  • Website refers to Passive Advantage LLC, accessible from www.passiveadvantage.com
  • You means the individual accessing or using the Service, or the company, or other legal entity on behalf of which such individual is accessing or using the Service, as applicable.

Collecting and Using Your Personal Data

Types of Data Collected

Personal Data

While using Our Service, We may ask You to provide Us with certain personally identifiable information that can be used to contact or identify You. Personally identifiable information may include, but is not limited to:
  • Email address
  • First name and last name
  • Phone number
  • Address, State, Province, ZIP/Postal code, City
  • Usage Data

Usage Data

Usage Data is collected automatically when using the Service.
Usage Data may include information such as Your Device’s Internet Protocol address (e.g. IP address), browser type, browser version, the pages of our Service that You visit, the time and date of Your visit, the time spent on those pages, unique device identifiers and other diagnostic data.
When You access the Service by or through a mobile device, We may collect certain information automatically, including, but not limited to, the type of mobile device You use, Your mobile device unique ID, the IP address of Your mobile device, Your mobile operating system, the type of mobile Internet browser You use, unique device identifiers and other diagnostic data.
We may also collect information that Your browser sends whenever You visit our Service or when You access the Service by or through a mobile device.

Information from Third-Party Social Media Services

The Company allows You to create an account and log in to use the Service through the following Third-party Social Media Services:
  • Google
  • Facebook
  • Twitter
If You decide to register through or otherwise grant us access to a Third-Party Social Media Service, We may collect Personal data that is already associated with Your Third-Party Social Media Service’s account, such as Your name, Your email address, Your activities or Your contact list associated with that account.
You may also have the option of sharing additional information with the Company through Your Third-Party Social Media Service’s account. If You choose to provide such information and Personal Data, during registration or otherwise, You are giving the Company permission to use, share, and store it in a manner consistent with this Privacy Policy.

Tracking Technologies and Cookies

We use Cookies and similar tracking technologies to track the activity on Our Service and store certain information. Tracking technologies used are beacons, tags, and scripts to collect and track information and to improve and analyze Our Service. The technologies We use may include:
  • Cookies or Browser Cookies. A cookie is a small file placed on Your Device. You can instruct Your browser to refuse all Cookies or to indicate when a Cookie is being sent. However, if You do not accept Cookies, You may not be able to use some parts of our Service. Unless you have adjusted Your browser setting so that it will refuse Cookies, our Service may use Cookies.
  • Flash Cookies. Certain features of our Service may use local stored objects (or Flash Cookies) to collect and store information about Your preferences or Your activity on our Service. Flash Cookies are not managed by the same browser settings as those used for Browser Cookies. For more information on how You can delete Flash Cookies, please read “Where can I change the settings for disabling, or deleting local shared objects?” available at https://helpx.adobe.com/flash-player/kb/disable-local-shared-objects-flash.html#main_Where_can_I_change_the_settings_for_disabling__or_deleting_local_shared_objects_
  • Web Beacons. Certain sections of our Service and our emails may contain small electronic files known as web beacons (also referred to as clear gifs, pixel tags, and single-pixel gifs) that permit the Company, for example, to count users who have visited those pages or opened an email and for other related website statistics (for example, recording the popularity of a certain section and verifying system and server integrity).
Cookies can be “Persistent” or “Session” Cookies. Persistent Cookies remain on Your personal computer or mobile device when You go offline, while Session Cookies are deleted as soon as You close Your web browser. Learn more about cookies: Cookies: What Do They Do?.
We use both Session and Persistent Cookies for the purposes set out below:

Necessary / Essential Cookies
Type: Session Cookies
Administered by: Us
Purpose: These Cookies are essential to provide You with services available through the Website and to enable You to use some of its features. They help to authenticate users and prevent fraudulent use of user accounts. Without these Cookies, the services that You have asked for cannot be provided, and We only use these Cookies to provide You with those services.
Cookies Policy / Notice Acceptance Cookies
Type: Persistent Cookies
Administered by: Us
Purpose: These Cookies identify if users have accepted the use of cookies on the Website.
Functionality Cookies
Type: Persistent Cookies
Administered by: Us
Purpose: These Cookies allow us to remember choices You make when You use the Website, such as remembering your login details or language preference. The purpose of these Cookies is to provide You with a more personal experience and to avoid You having to re-enter your preferences every time You use the Website.

For more information about the cookies we use and your choices regarding cookies, please visit our Cookies Policy or the Cookies section of our Privacy Policy.

Use of Your Personal Data

The Company may use Personal Data for the following purposes:
  • To provide and maintain our Service, including to monitor the usage of our Service.
  • To manage Your Account: to manage Your registration as a user of the Service. The Personal Data You provide can give You access to different functionalities of the Service that are available to You as a registered user.
  • For the performance of a contract: the development, compliance and undertaking of the purchase contract for the products, items or services You have purchased or of any other contract with Us through the Service.
  • To contact You: To contact You by email, telephone calls, SMS, or other equivalent forms of electronic communication, such as a mobile application’s push notifications regarding updates or informative communications related to the functionalities, products or contracted services, including the security updates, when necessary or reasonable for their implementation.
  • To provide You with news, special offers and general information about other goods, services and events which we offer that are similar to those that you have already purchased or enquired about unless You have opted not to receive such information.
  • To manage Your requests: To attend and manage Your requests to Us.
  • For business transfers: We may use Your information to evaluate or conduct a merger, divestiture, restructuring, reorganization, dissolution, or other sale or transfer of some or all of Our assets, whether as a going concern or as part of bankruptcy, liquidation, or similar proceeding, in which Personal Data held by Us about our Service users is among the assets transferred.
  • For other purposes: We may use Your information for other purposes, such as data analysis, identifying usage trends, determining the effectiveness of our promotional campaigns and to evaluate and improve our Service, products, services, marketing and your experience.
We may share Your personal information in the following situations:
  • With Service Providers: We may share Your personal information with Service Providers to monitor and analyze the use of our Service, to contact You.
  • For business transfers: We may share or transfer Your personal information in connection with, or during negotiations of, any merger, sale of Company assets, financing, or acquisition of all or a portion of Our business to another company.
  • With Affiliates: We may share Your information with Our affiliates, in which case we will require those affiliates to honor this Privacy Policy. Affiliates include Our parent company and any other subsidiaries, joint venture partners or other companies that We control or that are under common control with Us.
  • With business partners: We may share Your information with Our business partners to offer You certain products, services or promotions.
  • With other users: when You share personal information or otherwise interact in the public areas with other users, such information may be viewed by all users and may be publicly distributed outside. If You interact with other users or register through a Third-Party Social Media Service, Your contacts on the Third-Party Social Media Service may see Your name, profile, pictures and description of Your activity. Similarly, other users will be able to view descriptions of Your activity, communicate with You and view Your profile.
  • With Your consent: We may disclose Your personal information for any other purpose with Your consent.

Retention of Your Personal Data

The Company will retain Your Personal Data only for as long as is necessary for the purposes set out in this Privacy Policy. We will retain and use Your Personal Data to the extent necessary to comply with our legal obligations (for example, if we are required to retain your data to comply with applicable laws), resolve disputes, and enforce our legal agreements and policies.
The Company will also retain Usage Data for internal analysis purposes. Usage Data is generally retained for a shorter period of time, except when this data is used to strengthen the security or to improve the functionality of Our Service, or We are legally obligated to retain this data for longer time periods.

Transfer of Your Personal Data

Your information, including Personal Data, is processed at the Company’s operating offices and in any other places where the parties involved in the processing are located. It means that this information may be transferred to — and maintained on — computers located outside of Your state, province, country or other governmental jurisdiction where the data protection laws may differ than those from Your jurisdiction.
Your consent to this Privacy Policy followed by Your submission of such information represents Your agreement to that transfer.
The Company will take all steps reasonably necessary to ensure that Your data is treated securely and in accordance with this Privacy Policy and no transfer of Your Personal Data will take place to an organization or a country unless there are adequate controls in place including the security of Your data and other personal information.

Disclosure of Your Personal Data

Business Transactions

If the Company is involved in a merger, acquisition or asset sale, Your Personal Data may be transferred. We will provide notice before Your Personal Data is transferred and becomes subject to a different Privacy Policy.

Law enforcement

Under certain circumstances, the Company may be required to disclose Your Personal Data if required to do so by law or in response to valid requests by public authorities (e.g. a court or a government agency).

Other legal requirements

The Company may disclose Your Personal Data in the good faith belief that such action is necessary to:
  • Comply with a legal obligation
  • Protect and defend the rights or property of the Company
  • Prevent or investigate possible wrongdoing in connection with the Service
  • Protect the personal safety of Users of the Service or the public
  • Protect against legal liability

Security of Your Personal Data

The security of Your Personal Data is important to Us, but remember that no method of transmission over the Internet, or method of electronic storage is 100% secure. While We strive to use commercially acceptable means to protect Your Personal Data, We cannot guarantee its absolute security.

Children's Privacy

Our Service does not address anyone under the age of 13. We do not knowingly collect personally identifiable information from anyone under the age of 13. If You are a parent or guardian and You are aware that Your child has provided Us with Personal Data, please contact Us. If We become aware that We have collected Personal Data from anyone under the age of 13 without verification of parental consent, We take steps to remove that information from Our servers.
If We need to rely on consent as a legal basis for processing Your information and Your country requires consent from a parent, We may require Your parent’s consent before We collect and use that information.

Links to Other Websites

Our Service may contain links to other websites that are not operated by Us. If You click on a third party link, You will be directed to that third party’s site. We strongly advise You to review the Privacy Policy of every site You visit.
We have no control over and assume no responsibility for the content, privacy policies or practices of any third party sites or services.

Changes to this Privacy Policy

We may update Our Privacy Policy from time to time. We will notify You of any changes by posting the new Privacy Policy on this page.
We will let You know via email and/or a prominent notice on Our Service, prior to the change becoming effective and update the “Last updated” date at the top of this Privacy Policy.
You are advised to review this Privacy Policy periodically for any changes. Changes to this Privacy Policy are effective when they are posted on this page.

Contact Us

If you have any questions about this Privacy Policy, You can contact us:

By email: support@passiveadvantage.com
By visiting this page on our website: www.passiveadvantage.com

Privacy Policy for Passive Advantage LLC

Please read these Terms and Conditions carefully before using this Website.

Terms and Conditions The Website and its Content is owned by Passive Advantage LLC (“Company”, “we”, or “us”). The term “you” refers to the user or viewer of our Website.

Please read these Terms and Conditions (“T&C”) carefully. We reserve the right to change these Terms and Conditions on the Website at any time without notice, and by using the Website and its Content you are agreeing to the T&C as they appear, whether or not you have read them. If you do not agree with these T&C, please do not use our Website or its Content.

Website Use and Consent The words, design, layout, graphics, photos, images, information, materials, documents, data, databases and all other information and intellectual property accessible on or through this Website (“Content”) is our property and is protected by United States intellectual property laws.

If you have purchased a service, program, product or subscription or otherwise entered into a separate agreement with us you will also be subject to the terms of that agreement or those terms of use, which shall prevail in the event of a conflict. Online purchases have additional terms of use relating to the transaction.

By accessing or using this Website and its Content, you represent and warrant that you are at least 18 years old and that you agree to and to abide by these T&C. Any registration by, use of or access to the Website and its Content by anyone under age 18 is unauthorized, unlicensed and in violation of these T&C.

Intellectual Property Rights Our Limited License to You. This Website and its Content is property solely owned by us and/or our affiliates or licensors, unless otherwise noted, and it is protected by copyright, trademark, and other intellectual property laws.

If you view, purchase or access our Website or any of its Content, you will be considered our Licensee. For the avoidance of doubt, you are granted a revocable, non-transferable license for personal, non-commercial use only, limited to you only.

When you purchase or access our Website or any of its Content, you agree that:

  • You will not copy, duplicate or steal our Website or Content. You understand that doing anything with our Website or its Content that is contrary to these T&C and the limited license we are providing to you herein is considered theft, and we reserve our right to prosecute theft to the full extent of the law.
  • You are permitted from time to time to download and/or print one copy of individual pages of the Website or its Content, for your personal, non-commercial use, provided that you give us full attribution and credit by name, keep intact all copyright, trademark and other proprietary notices and, if used electronically, you must include the link back to the Website page from which the Content was obtained.
  • You may not in any way at any time use, copy, adapt, imply or represent that our Website or its Content is yours or created by you. By downloading, printing, or otherwise using our Website Content for personal use you in no way assume any ownership rights of the Content – it is still our property.
  • You must receive our written permission before using any of our Website Content for your own business use or before sharing with others. This means that you may not modify, copy, reproduce, republish, upload, post, transmit, translate, sell, market, create derivative works, exploit, or distribute in any manner or medium (including by email, website, link or any other electronic means) any Website Content because that is considered stealing our work.
  • We are granting you a limited license to enjoy our Website and its Content for your own personal use, not for your own business/commercial use or in any that earns you money, unless we give you written permission that you may do so.

As a Licensee, you understand and acknowledge that this Website and its Content have been developed or obtained by us through the investment of significant time, effort and expense, and that this Website and its Content are valuable, special and unique assets of ours which need to be protected from improper and unauthorized use. We clearly state that you may not use this Website or its Content in a manner that constitutes an infringement of our rights or that has not been authorized by us.

The trademarks and logos displayed on our Website or its Content are trademarks belonging to us, unless otherwise indicated. Any use including framing, meta tags or other text utilizing these trademarks, or other trademarks displayed, is strictly prohibited without our written permission.

All rights not expressly granted in these terms or any express written license, are reserved by us.

Your License to Us. By posting or submitting any material on or through our Website such as comments, posts, photos, images or videos or other contributions, you are representing that you are the owner of all such materials and you are at least 18 years old.

When you submit to us or post any comment, photo, image, video or any other submission for use on or through our Website, you are granting us, and anyone authorized by us, an unlimited, royalty-free, perpetual, irrevocable, non-exclusive, unrestricted, worldwide license to use, copy, modify, transmit, sell, exploit, create derivative works from, distribute, and/or publicly perform or display such contributions, in whole or in part, in any manner or medium, now known or developed in the future, for any purpose, and granting us the right to make it part of our current or future Website and its Content. This right includes granting us proprietary rights or intellectual property rights under any relevant jurisdiction without any further permission from you or compensation by us to you.

You also grant us, and anyone authorized by us, the right to identify you as the author of any of your comments, posts, photos, images, videos or other contributions by name, email address, or screen name. You acknowledge that we have the right but not the obligation to use any contributions from you and that we may elect to cease the use of any such contributions on our Website or in our Content at any time for any reason.

Request for Permission to Use Content Any request for written permission to use our Content, or any other intellectual property or property belonging to us, should be made BEFORE you wish to use the Content by completing the “Contact Us” form on this Website, or by sending an e-mail to support@passiveadvantage.com.

We very clearly state that you may not use any Content in any way that is contrary to these T&C unless we have given you specific written permission to do so. If you are granted permission by us, you agree to use the specific Content that we allow and ONLY in the ways for which we have given you our written permission. If you choose to use the Content in ways that we do not specifically give you written permission, you agree now that you will be treated as if you had copied, duplicated and/or stolen such Content from us, and you consent to immediately stop using such Content and to take whatever actions as we may request and by the methods and in the time frame that we prescribe to protect our intellectual property and ownership rights in our Website and its Content.

Personal Responsibility and Assumption of Risk As a Licensee, you agree that you are using your own judgment in using our Website and its Content and you agree that you are doing so at your own risk. You agree and understand that you assume all risks and no results are guaranteed in any way related to this Website and/or any of its Content. This Website and its Content are merely to provide you with education and tools to help you make your own decisions for yourself. You are solely responsible for your actions, decisions and results based on the use, misuse or non-use of this Website or any of its Content.

Disclaimer Our Website and its Content are for informational and educational purposes only. To the fullest extent permitted by law, we expressly exclude any liability for any direct, indirect or consequential loss or damage incurred by you or others in connection with our Website and its Content, including without limitation any liability for any accidents, delays, injuries, harm, loss, damage, death, lost profits, personal or business interruptions, misapplication of information, physical or mental disease, condition or issue, physical, mental, emotional, or spiritual injury or harm, loss of income or revenue, loss of business, loss of profits or contracts, anticipated savings, loss of data, loss of goodwill, wasted time and for any other loss or damage of any kind, however and whether caused by negligence, breach of contract, or otherwise, even if foreseeable. You specifically acknowledge and agree that we are not liable for any defamatory, offensive or illegal conduct of any other Website participant or user, including you. Legal and Financial Disclaimer. This Website and its Content are not to be perceived or relied upon in any way as business, financial or legal advice. The information provided through our Website and its Content is not intended to be a substitute for professional advice that can be provided by your own accountant, lawyer, or financial advisor. We are not giving financial or legal advice in any way. You are hereby advised to consult with your own accountant, lawyer or financial advisor for any and all questions and concerns you have regarding your own income and taxes pertaining to your specific financial and/or legal situation. You agree that we are not responsible for your earnings, the success or failure of your business decisions, the increase or decrease of your finances or income level, or any other result of any kind that you may have as a result of information presented to you through our Website or its Content. You are solely responsible for your results.

Earnings Disclaimer. You acknowledge that we have not and do not make any representations as to the health physical, mental, emotional, spiritual or health benefits, future income, expenses, sales volume or potential profitability or loss of any kind that may be derived as a result of your use of this Website or its Content. We cannot and do not guarantee that you will attain a particular result, positive or negative, financial or otherwise, through the use of our Website or its Content and you accept and understand that results differ for each individual. We also expressly disclaim responsibility in any way for the choices, actions, results, use, misuse or non-use of the information provided or obtained through the use of our Website or its Content. You agree that your results are strictly your own and we are not liable or responsible in any way for your results. Warranties Disclaimer. WE MAKE NO WARRANTIES AS TO OUR WEBSITE OR ITS CONTENT. YOU AGREE THAT OUR WEBSITE AND ITS CONTENTS ARE PROVIDED “AS IS” AND WITHOUT WARRANTIES OF ANY KIND EITHER EXPRESS OR IMPLIED. TO THE FULLEST EXTENT PERMISSIBLE PURSUANT TO APPLICABLE LAW, WE DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT. WE DO NOT WARRANT THAT THE WEBSITE OR ITS CONTENT WILL BE FUNCTIONAL, UNINTERRUPTED, CORRECT, COMPLETE, APPROPRIATE, OR ERROR-FREE, THAT DEFECTS WILL BE CORRECTED, OR THAT ANY PART OF THE WEBSITE, CONTENT ARE FREE OF VIRUSES OR OTHER HARMFUL COMPONENTS. WE DO NOT WARRANT OR MAKE ANY REPRESENTATIONS REGARDING THE USE OR THE RESULTS OF THE USE OF OUR WEBSITE OR ITS CONTENT OR ON THIRD-PARTY WEBSITES IN TERMS OF THEIR CORRECTNESS, ACCURACY, TIMELINESS, RELIABILITY OR OTHERWISE.

Technology Disclaimer. We try to ensure that the availability and delivery of our Website and its Content is uninterrupted and error-free. However, we cannot guarantee that your access will not be suspended or restricted from time to time, including to allow for repairs, maintenance or updates, although, of course, we will try to limit the frequency and duration of suspension or restriction. To the fullest extent permitted by law, we will be not be liable to you for damages or refunds, or for any other recourse, should our Website or its Content become unavailable or access to the them becomes slow or incomplete due to any reason, such as system back-up procedures, internet traffic volume, upgrades, overload of requests to the servers, general network failures or delays, or any other cause which may from time to time make our Website or its Content inaccessible to you.

Errors and Omissions. We make no warranty or guarantee as to the accuracy, timeliness, performance, completeness or suitability of the information on our Website or its Content. Every effort has been made to present you with the most accurate, up-to-date information, but because the nature of scientific research is constantly evolving, we cannot be held responsible or accountable for the accuracy of our content. We assume no liability for errors or omissions on the Website, its Content, or in other information referenced by or linked to the site. You acknowledge that such information may contain inaccuracies or errors to the fullest extent permitted by law.

Links to Other Websites. We may provide links and pointers to other websites maintained by third parties which may take you outside of our Website or its Content. These links are provided for your convenience and the inclusion of any link in our Website or its Content to any other website does not imply our endorsement, sponsorship, or approval of that website or its owner. We do not endorse and we are not responsible for the views, opinions, facts, advice, statements, errors or omissions provided by external resources referenced in our Website or its Content, or their accuracy or reliability. We have no control over the contents or functionality of those websites and so we accept no responsibility for any loss, damage, or otherwise that may arise from your use of them. It is your responsibility to review the terms and conditions and privacy policies of those linked websites to confirm that you understand and agree with those policies.

Limitations on Linking and Framing. You may establish a hypertext link to our Website or Content so long as the link does not state or imply any sponsorship, endorsement by, or ownership by in our Website or Content and does not state or imply that we are have sponsored, endorsed or have ownership rights in your website. However, you may not frame or inline link our Content without our written permission.

By purchasing and/or using our Website and its Content in any way or for any reason, you also implicitly agree to our full Disclaimer which may be found on this Website.

Indemnification, Limitation of Liability and Release of Claims Indemnification. You agree at all times to defend, indemnify and hold harmless our Company, as well as any of our affiliates, agents, contractors, officers, directors, shareholders, employees, joint venture partners, successors, transferees, assignees, and licensees, as applicable, from and against any and all claims, causes of action, damages, liabilities, costs and expenses, including legal fees and expenses, arising out of or related to our Website, its Content or your breach of any obligation, warranty, representation or covenant set forth in these T&C or in any other agreement with us.

Limitation of Liability. We will not be held responsible or liable in any way for the information, products or materials that you request or receive through or on our Website and its Content. We do not assume liability for accidents, delays, injuries, harm, loss, damage, death, lost profits, personal or business interruptions, misapplication of information, physical or mental disease, condition or issue, or otherwise, due to any act or default of anyone or any business, whether owners, staff, agents, joint venture partners, contractors, vendors, affiliates or otherwise, affiliated with us. We do not assume liability for any owners, staff, agents, joint venture partners, contractors, vendors, affiliates or otherwise who is engaged in rendering our Website or its Content, or in any way or in any location. In the event that you use our Website and its Content or any other information provided by us or affiliated with us, we assume no responsibility.

Release of Claims. In no event will we be liable to any party for any type of direct, indirect, special, incidental, equitable or consequential damages for any use of or reliance on our Website and its Content, or on those affiliated with us in any way, and you hereby release us from any and all claims; including, without limitation, those related to lost profits, personal or business interruptions, personal injuries, accidents, misapplication of information, or any other loss, physical or mental disease, condition or issue, or otherwise, even if we are expressly advised of the possibility of such damages or difficulties.

Your Conduct You are agreeing that you will not use our Website or its Conduct in any way that causes or is likely to cause the Website, Content, or access to them to be interrupted, damaged or impaired in any way. You understand that you are solely responsible for all electronic communications and content sent from your computer to this Website and its Content and to us.

You agree to only purchase goods or services for yourself or for another person for whom you are legally permitted to do so or for whom you have obtained the express consent to provide their name, address, method of payment, credit card number, and billing information.

You agree to be financially responsible for all purchases made by you or someone acting on your behalf through the Website or its Content. You agree to use the Website and its Content for legitimate, non-commercial purposes only and not for speculative, false, fraudulent, or illegal purposes.

You must use the Website and its Content for lawful purposes only. You agree that you will not use the Website or its Content in any of the following ways:

For fraudulent purposes or in connection with a criminal offense or otherwise carry out any unlawful activity To send, use or re-use any material that is illegal, offensive, abusive, indecent, harmful, defamatory, obscene or menacing, threatening, objectionable, invasive of privacy, in breach of confidence, infringing of any intellectual property rights, or that may otherwise may injure others To send, negatively impact, or infect our Website or its Content with software viruses or any other harmful or similar computer code designed to adversely affect the operation of any computer software or hardware, commercial solicitation, chain letters, mass mailings or any spam, whether intended or not To cause annoyance, inconvenience or needless anxiety To impersonate any third party or otherwise mislead as to the origin of your contributions To reproduce, duplicate, copy or resell any part of our Website or its Content in a way that is not in compliance with these T&C or any other agreement with us.

Online Commerce Certain sections of the Website or its Content may allow you to make purchases from us or from other merchants. If you make a purchase from us on or through our Website or its Content, all information obtained during your purchase or transaction and all of the information that you give as part of the transaction, such as your name, address, method of payment, credit card number, and billing information, may be collected by both us, the merchant, and our payment processing company.

Your participation, correspondence or business dealings with any affiliate, individual or company found on or through our Website, all purchase terms, conditions, representations or warranties associated with payment, refunds, and/or delivery related to your purchase, are solely between you and the merchant. You agree that we shall not be responsible or liable for any loss, damage, refunds, or other matters of any sort that incurred as the result of such dealings with a merchant.

Payment processing companies and merchants may have privacy and data collection practices that are different from ours. We have no responsibility or liability for these independent policies of the payment processing companies and Merchants. In addition, when you make certain purchases through our Website or its Content, you may be subject to the additional terms and conditions of a payment processing company, Merchant or us that specifically apply to your purchase. For more information regarding a Merchant and its terms and conditions that may apply, visit that merchant’s Website and click on its information links or contact the Merchant directly.

You release us, our affiliates, our payment processing company, and merchants from any damages that you incur, and agree not to assert any claims against us or them, arising from your purchase through or use of our Website or its Content.

Termination We reserve the right in our sole discretion to refuse or terminate your access to the Website and its Content, in full or in part, at any time without notice. In the event of cancellation or termination, you are no longer authorized to access the part of the Website or Content affected by such cancellation or termination. The restrictions imposed on you in these T&C with respect to the Website and its Content will still apply now and in the future, even after termination by you or us. If you have any questions about these T&C, please contact us at support@passiveadvantage.com.

Please read this Privacy Policy carefully before using this Website.

Privacy Policy Consent The Website and its Content is owned by Passive Advantage LLC(“Company”, “we”, or “us”). The term “you” refers to the user or viewer of our Website.

Please read this Privacy Policy carefully. We reserve the right to change this Privacy Policy on the Website at any time without notice. Use of any information or contribution that you provide to us, or which is collected by us on or through our Website or its Content is governed by this Privacy Policy. By using our Website or its Content, you consent to this Privacy Policy, whether or not you have read it. If you do not agree with this Privacy Policy, please do not use our Website or its Content.

Submission, Storage and Sharing of Personal Data To use our Website or its Content, we may seek personal data including your name, e-mail address, street address, city, state, billing information, or other personally identifying information (“Confidential Information”), or you may offer or provide a comment, photo, image, video or any other submission to us when visiting or interacting with our Website and its Content (“Other Information”). By providing such Confidential Information or Other Information to us, you grant us permission to use and store such information.

Your Confidential Information is stored through by us internally or through a data management system. Your Confidential Information will only be accessed by those who help to obtain, manage or store that Information, or who have a legitimate need to know such Confidential Information. There may be an occasion where we may ask for demographic information such as gender or age, but if you choose not to provide such data and information, you may still use the Website and its Content, but you may not be able to use those services where demographic information may be required.

Confidentiality We aim to keep the Confidential Information that you share with us confidential. Please note that we may disclose such Confidential Information if required to do so by law or in the good-faith belief that: (1) such action is necessary to protect and defend our rights or property or those of our users or licensees, (2) to act as immediately necessary in order to protect the personal safety or rights of our users or the public, or (3) to investigate or respond to any real or perceived violation of this Privacy Policy or of our Disclaimer, Terms and Conditions, or any other terms of use or agreement with us.

Viewing by Others Note that whenever you voluntarily make your Confidential Information or Other Information available for viewing by others online through this Website or its Content, it may be seen, collected and used by others, and therefore, we cannot be responsible for any unauthorized or improper use of the Confidential Information or Other Information that you voluntarily share.

Passwords To use certain features of the Website or its Content, you may need a username and password. You are responsible for maintaining the confidentiality of the username and password, and you are responsible for all activities, whether by you or by others, that occur under your username or password and within your account. You agree to notify us immediately of any unauthorized or improper use of your username or password or any other breach of security. To help protect against unauthorized or improper use, make sure that you log out at the end of each session requiring your username and password. It is your responsibility to protect your own username and password from disclosure to others. We cannot and will not be liable for any loss or damage arising from your failure to protect your username, password or account information. If you share your username or password with others, they may be able to obtain access to your personal information at your own risk.

By using our Website and its Content you agree to enter true and accurate information on the Website and its Content. If you enter a bogus email address we have the right to immediately inactivate your account. We will use our best efforts to keep your username and password(s) private and will not otherwise share your password(s) without your consent, except as necessary when the law requires it or in the good faith belief that such action is necessary, particularly when disclosure is necessary to identify, contact or bring legal action against someone who may be causing injury to others or interfering with our rights or property.

Unsubscribe You may unsubscribe to our e-newsletters or updates at any time through the unsubscribe link at the footer of all e-mail communications. We manage e-mail lists through a list management system. Unsubscribing from one list managed by us will not necessarily remove you from all publication email lists. If you have questions or are experiencing problems unsubscribing, please contact us at support@passiveadvantage.com.

Anti-Spam Policy We have a no spam policy and provide you with the ability to opt-out of our communications by selecting the unsubscribe link at the footer of all e-mails. We have taken the necessary steps to ensure that we are compliant with the CAN-SPAM Act of 2003 by never sending out misleading information. We will not sell, rent or share your email address.

Children’s Online Privacy Protection Act Compliance We do not collect any information from anyone under 13 years of age in compliance with COPPA (Children’s Online Privacy Protection Act), and our Website and its Content is directed to individuals who are at least 13 years old or older.

Anonymous Data Collection and Use To maintain our Website’s high quality, we may use your IP address to help diagnose problems with our server and to administer the Website by identifying which areas of the Website are most heavily used, and to display content according to your preferences. Your IP address is the number assigned to computers connected to the Internet. This is essentially “traffic data” which cannot personally identify you, but is helpful to us for marketing purposes and for improving our services. Traffic data collection does not follow a user’s activities on any other Websites in any way. Anonymous traffic data may also be shared with business partners and advertisers on an aggregate basis.

Use of “Cookies” We may use the standard “cookies” (not the yummy kind!) feature of major web browsers. We do not set any personally identifiable information in cookies, nor do we employ any data-capture mechanisms on our Website other than cookies. You may choose to disable cookies through your own web browser’s settings. However, disabling this function may diminish your experience on the Website and some features may not work as intended. We have no access to or control over any information collected by other individuals, companies or entities whose website or materials may be linked to our Website or its Content.

Privacy Policies of Other Websites We have no responsibility or liability for the content and activities of any other individual, company or entity whose website or materials may be linked to our Website or its Content, and thus we cannot be held liable for the privacy of the information on their website or that you voluntarily share with their website. Please review their privacy policies for guidelines as to how they respectively store, use and protect the privacy of your Confidential Information and Other Information.

Assignment of Rights In the event of an assignment, sale, joint venture, or other transfer of some or all of our assets, you agree we can assign, sell, license or transfer any information that you have provided to us. Please note, however, that any purchasing party is prohibited from using the Confidential Information or Other Information submitted to us under this Privacy Policy in a manner that is materially inconsistent with this Privacy Policy without your prior consent.

Notification of Changes We may use your contact information to inform you of changes to the Website or its Content, or, if requested, to send you additional information about us. We reserve the right, at our sole discretion, to change, modify or otherwise alter our Website, its Content and this Privacy Policy at any time. Such changes and/or modifications shall become effective immediately upon posting our updated Privacy Policy. Please review this Privacy Policy periodically. Continued use of any of information obtained through or on the Website or its Content following the posting of changes and/or modifications constitutes acceptance of the revised Privacy Policy.

If you have any questions about this Privacy Policy, please contact us at support@passiveadvantage.com.

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