A subscription credit facility (a “Facility”) is an extension of credit by a bank, financing company, or other credit institution (each, a “Lender”) to a closed end real estate or private equity fund (the “Fund”). The defining characteristic of such a Facility is the collateral package securing the Fund’s repayment of the Lender’s extension of credit, which is composed of the unfunded commitments (equity or debt “Capital Commitments”) of the limited partners to the Fund (the “Investors”) to make capital contributions (“Capital Contributions”) when called upon by the Fund’s general partner, not the underlying investment assets of the Fund itself. The loan documents for the Facility contain provisions securing the rights of the Creditor, including a pledge of (i) the Capital Commitments of the Investors, (ii) the right of the Fund to make a call (each, a “Capital Call”) upon the Capital Commitments of the Investors after an event of default and to enforce the payment thereof, and (iii) the account into which the Investors fund Capital Contributions in response to a Capital Call.

While there is no definitive United States Supreme Court or federal circuit court of appeals case law addressing this issue, parties to Facilities are generally comfortable that Investors’ equity Capital Commitments are enforceable obligations. We are not aware of any case law in contravention of the decisions discussed in our prior article on the enforceability of equity Capital Commitments in a Facility.¹ Nor are we aware of any institutional Investor payment defaults under a Facility, which would have brought this issue to a head. However, the case law is less certain with respect to the enforceability of debt Capital Commitments within the Fund structure.

Tax Rationale

Some Funds are comprised entirely of debt Capital Commitments. In addition, even when a particular Investor’s commitment consists of...