Syndication Distributions Questions

11 Replies

Investing as a syndication limited partner, when is capital returned.  I know there are alot of variables(buy hold, vs value add, etc), but what is typical.  Let's assume a buy an hold scenario that has stabilized.  If there is a preferred return of 8% that is distributed that is a return on capital, correct? What if the property is a home run and there are funds available to pay out more.  Is it distributed? And if so is it a return on capital or a return on capital? Any thoughts are appreciated about typical distribution scenarios.

Capital is usually returned on an exit or refinance. 

You are distributing funds as there is cash flow available. The pref of 8% does not dictate when you distribute to investors. It dictates who gets paid first. This is all return ON capital. 

Thanks Sam.  I appreciate your response.  So typically capital is not returned until a major event(refi or sale), that makes sense.  Thanks for the explanation.

Unfortunately, there is no "typical" scenario. I've seen straight %% split, preferred return with waterfall, preferred return without a waterfall, return of capital, return on capital, and every other mix and match.

Every deal has an operating agreement that should spell out all the ways the money is distributed, what constitutes return on capital vs return off capital, splits between sponsors and investors, etc.

Thanks Nick.  So technically, you can structure any way investors agree to.  For example, you could have it where investors get X% and anything about that would be Return of Capital? This structure could be beneficial to investors that have an interest in having some of their capital returned earlier.

Yes, @Brian Gerace , you can structure it in multiple ways. From the investor's perspective though, every distribution is a return of capital until all initial capital is returned. Anything over that is pure profit. In other words, it's all about what you have at risk vs what you're getting paid back. That's how I view it anyway.

Awesome info @Nick B. .  I might just be overthinking so thanks for the clarification.  I saw a sample distribution model that had some elaborate calculation where there was a preferred dist, then a return of capital. So the next distribution had a pref dist based on a lower Capital amount because of the previous return on capital.  

@Brian Gerace      Great Question! In many deals (mine included) anything over the pref is a return OF capital and reduces the capital balance of the investor but NOT the % ownership.  Eventually the pref goes away as capital is returned and the investors continue to receive 70% of the surplus cash flow until the property is sold.

@Brian Gerace after the close it’s sorta like a the day after the wedding in a marriage.

You are sorta along for the ride. Hopefully you know and jive with the leads philosophy. In my opinion the lead investor will likely make the right choice but there are some instances where they make a little extra risk and hold on for potential appreciation.

For example say there is a 60% return in two years. A lot of people may sell where a syndication who might want to push it for the 100% ROI might stay in the deal too long.

@Brian Gerace one thing that may be helpful is if you go onto a site like www.realtyshares.com and read through some of their deals and the language around distributions. For example, here's one I actually put some money into:

https://www.realtyshares.com/investments/courtship-village

"Distributable cash flow from operations and proceeds from a capital event is to be distributed in order as follows:

  1. To all investors pro-rata and pari-passu until investors have earned a 9.0% annualized preferred return;
  2. Proceeds above a 9% annualized internal rate of return to deal-level investors are to be split 80% to deal-level investors and 20% to the Sponsor, until such investors have earned a 16% annual internal rate of return;
  3. Proceeds above a 16% annualized internal rate of return to deal-level investors are to be split 70% to deal-level investors and 30% to the Sponsor, until such investors have earned a 24% annual internal rate of return;
  4. Proceeds above a 24% annualized internal rate of return to deal-level investors are to be split 50% to deal-level investors and 50% to the Sponsor, until such investors have earned a 24% annual internal rate of return"

So yes, as an LP I get cash distributions on a quarterly basis, and then also upon an exit event. 

Hope this helps,

James

@Brian Gerace some good answers so far. I would begin talking with some sponsors and also research the crowdfunding sites. There are a lot of variations on what companies do. The best way to learn is to talk to those with offerings. Once you are comfortable with the structures, then you can begin investing with knowledge. 

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