How do payouts work in a partnership?

Question

In a syndication deal--when the money starts coming in--if I am the general partner, how do I distribute funds to investors? What are the tax implications? Thanks!

Evan Polaski · Answer

@Miah Atwood, are you talking generally how are distributions allocated (as noted this is outlined in your waterfall), or tactically how do you pay investors (check, ACH, wire).

The answer to either is: it depends.  Nothing is set in stone.  Some syndications have prefs, some prioritize return of vs return on capital first, some pay monthly, some don't pay for the first year, some pay quarterly.  You need to figure out what is best for you, your operations and what your investors are most likely to want to make their investment decision.

Then you get to tax treatment: you can treat your payouts of distributions and return of capital.  You can treat them as a return on capital.

The moral is: there are a 1,000 ways you can do all of this.  And it is entirely up to you.

Julio Gonzalez · Answer

@Miah Atwood There would typically be a waterfall schedule that breaks down how to disburse the cash. Each deal is different. For example, if you offered LPs an 8% preferred return, you'd first pay the LPs their pref and then continue to move down the waterfall.

Brock Mogensen · Answer

This is a very broad question.  But the funds will be disbursed based on the equity splits you included in the PPM. Generally first cashflow distributions take place 3 months after closing. But that can vary.  The great part about syndication is you can leverage additional tax benefits like cost segregation studies.