Addressing UBTI Concerns In Capital Call Subscription Credit Facilities

Keywords: UBTI, unrelated business taxable income, subscription credit facilities

A subscription credit facility (a Facility), also frequently referred to as a capital call facility, is a loan by a bank or other credit institution (the Creditor) to a real estate or private equity fund (the Fund). A Facility is defined by its collateral package: the obligations are secured by the unfunded capital commitments (the Unfunded Commitments) of the limited partners of the Fund (the Investors) and the Creditor's primary and intended source of repayment is the funding of capital contributions (Capital Contributions) by such Investors.

When a Fund incurs debt under a Facility, certain of its tax-exempt Investors, such as pension plans, private foundations, universities and charitable endowments (Tax-Exempt Investors) can be subject to unrelated business income tax (UBIT) on their unrelated business taxable income (UBTI) under the US Internal Revenue Code (the Code).