How Investor Gets Paid in Syndication Deal

4 Replies

I understand how the deal syndicator will get paid on a deal (asset management fee, acquisition fee, etc) but how (specifically) would an investor who puts money into a deal get paid? Concept and examples are appreciated.

Vernon,

That depends, but a typical scenario would be a scheduled payment plus interest and a share of the equity increase when the property is sold. Something like a 70/30 split where the limited partners get 70 percent and general partners get 30 percent. 8% return for the scheduled payments is currently typical and usually investments start at $50,000.

The investors gets paid in one or more of three ways (that I know of):

1) Preferred dividends.  Paid from cash flow first after all expenses.  If returns are not sufficient to pay expenses, this amount may not be paid.

2) General dividends.  Paid after expenses and preferred dividends.  If returns are not sufficient to pay preferred dividends, this amount may not be paid.

3) A share of profits when the investment is liquidated

The agreement filed when the syndication begins determines what types of payouts there are, when they happen, and who gets what proportion.  Some deals have preferred dividends; some don't.  Some may not even have any dividends at all and may simply hold on until liquidation of the asset.

Example:

Deal = $1,000,000 all in.

Bob, Joe and Sue each contribute $200,000.  Total:  $600,000.

Eight other investors each contribute $50,000.  Total: $400,000.

The partnership agreement states that Bob, Joe and Sue each get preferred dividends of 5% of the free cash flow profit since their contribution is significantly higher than the eight "other" investors.  Further, all investors get 2% per $50,000 invested as general dividends. 

In year 1, the investment returns $100,000 after all expenses paid.

Bob, Joe and Sue each get a preferred dividend check of $5,000.  Total of $15,000 paid in preferred dividends, leaving $85,000 profit.

The eight other investors only received a general dividend check for $2,000 because each of them contributed only $50,000.   Bob, Joe, and Sue also each received checks for $8000 since they contributed four $50,000 "chunks".  (2% * 4 * $100,000) = $8,000 each for them on top of their preferred dividends.  Total of $40,000 in general dividends paid out.

Summed up, a total of $65,000 is distributed in dividends and the remaining $35,000 is kept in the investment as liquid capital for contingencies, etc.

Dividends may be a set amount vs. a percentage, and if there's only enough cash flow in any given year to pay out preferred dividends, then the general dividend investors do not get paid that year.

That's very high level and could be adjusted in many ways to fit the goal of the syndication. I also kept the $ amounts low for simplicity.


Originally posted by @Erik Hatch :

Vernon,

That depends, but a typical scenario would be a scheduled payment plus interest and a share of the equity increase when the property is sold. Something like a 70/30 split where the limited partners get 70 percent and general partners get 30 percent. 8% return for the scheduled payments is currently typical and usually investments start at $50,000.

 Hey Eric thanks for that information. Thats clear and exactly what I needed thanks!

Originally posted by @Erik Whiting :

The investors gets paid in one or more of three ways (that I know of):

1) Preferred dividends.  Paid from cash flow first after all expenses.  If returns are not sufficient to pay expenses, this amount may not be paid.

2) General dividends.  Paid after expenses and preferred dividends.  If returns are not sufficient to pay preferred dividends, this amount may not be paid.

3) A share of profits when the investment is liquidated

The agreement filed when the syndication begins determines what types of payouts there are, when they happen, and who gets what proportion.  Some deals have preferred dividends; some don't.  Some may not even have any dividends at all and may simply hold on until liquidation of the asset.

Example:

Deal = $1,000,000 all in.

Bob, Joe and Sue each contribute $200,000.  Total:  $600,000.

Eight other investors each contribute $50,000.  Total: $400,000.

The partnership agreement states that Bob, Joe and Sue each get preferred dividends of 5% of the free cash flow profit since their contribution is significantly higher than the eight "other" investors.  Further, all investors get 2% per $50,000 invested as general dividends. 

In year 1, the investment returns $100,000 after all expenses paid.

Bob, Joe and Sue each get a preferred dividend check of $5,000.  Total of $15,000 paid in preferred dividends, leaving $85,000 profit.

The eight other investors only received a general dividend check for $2,000 because each of them contributed only $50,000.   Bob, Joe, and Sue also each received checks for $8000 since they contributed four $50,000 "chunks".  (2% * 4 * $100,000) = $8,000 each for them on top of their preferred dividends.  Total of $40,000 in general dividends paid out.

Summed up, a total of $65,000 is distributed in dividends and the remaining $35,000 is kept in the investment as liquid capital for contingencies, etc.

Dividends may be a set amount vs. a percentage, and if there's only enough cash flow in any given year to pay out preferred dividends, then the general dividend investors do not get paid that year.

That's very high level and could be adjusted in many ways to fit the goal of the syndication. I also kept the $ amounts low for simplicity.

 Eric thanks for the explanation and example! Very knowledgeable and very well explained thanks!

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