Return ON capital VS. Return OF capital in syndications
How are your syndications OA's structured, return OF or return ON capital?
Here is an example,
7.3. Distributions of Net Cash Flow. The Company shall distribute Net Cash Flow as follows:
(a) First, an amount, if any, to the Members for any Additional Capital that they may have contributed.
(b) Next, in the Managers’ sole discretion, to the Class A and Class B Members in an amount representing the return of all Capital Contributions of the Class A and Class B Members. 11
(c) Lastly, to the extent remaining, eighty percent (84%) to the Class A Members, to be distributed to the Class A Members in accordance with their respective Percentage Interest in Class A, and twenty percent (16%) to the Class B Members, in accordance with their respective Percentage Interest in Class B.
Are there any tax advantages to structuring this as a "return of capital" as opposed to a "return on capital" during the hold period? This way you're only hit with a taxable event at time of sale from the large capital event since the distributions during the hold are just technically a return OF your capital. However, this would not work out so well if the market were to drop on the back end. Would love to hear some opinions on this one