Additional Costs - Working Capital and Project Distributions

[Mark Butler]

Hello everyone

Question for the forum. While doing some of my financial modeling on a real estate property we are finding that a deal in Lubbock is passing our initial checks as it relates to the financial performance we are seeking. However, I am realizing that there are a few areas we may not be considering as it relates to the partnership we look to establish.

The goal is obviously to distribute free cash flow to investors based on % interest after we get leased and running. However, I was thinking about a scenario in which we may have outside costs that come up, such as maintenance, repairs, or annual taxes. These expenses are baked into our NOI calculations, but not in any systematic order and are always paid from revenues from the rent. My question is if we are paying out cash flows month to month (hypothetical) and a large cost item comes up do we then need to go back to the investors for a capital call? Or do we keep a reserve working capital account? Do we budget and capitalize this as part of the project budget from the beginning? Any advice would be greatly beneficial, thank you.