Preferred return in a multifamily syndication

5 Replies

For those of you invested in syndications with preferred returns, how does your sponsor communicate and track that preferred return if it is deferred? In the early stages of a deal after close, the preferred return in my experience is either lower in years 1/2 or deferred until the property is stabilized, then paid out at an agreed upon date, at a refi/capital event or upon selling the property. In my experience, this would usually be communicated ahead of time before the deal closes, as it is planned for. 

However, with COVID-19 and moratoriums on evictions in many states, this has to change the projections a bit, not only on a preferred return but on distributions overall. I assume that sponsors will prefer to hold onto more reserves until everything stabilizes by deferring some preferred returns and regular distributions, which seems to be a perfectly rational response. It would make no sense to continue distributions as if nothing is wrong, putting the entire deal at risk of failure or reduced returns. The question I have is, how do sponsors keep track of a preferred return if it is delayed/accrued vs regularly paid out? Sponsors out there, do you have a process in place to address this? 

@Evan Loader As a syndicator, we track them through the use of spreadsheets.  Some groups will use investor management software programs (ex. IMS, etc.) and others might still have different systems that they use.  We simply track how much each investor invested, what their preferred return should've been, and what was actually paid out for each quarter.  If there's a shortfall, it'll stand out so that we can see it in the future and can pay it out when there's money to do so.

Spreadsheet for sure. Always keep record of everything involved with a syndication and inform your investors immediately if you expect there to be a delay/hold in their return. 

This example is over a 5 year hold period, if everything went to plan. (It never does) So, I just go in there and adjust to whatever the actual numbers are. 

Our system automatically keeps track of everyone so that if that were to happen, we would "catch up" all our partners to their pref. I'm sure you're keeping track as well to make sure you get the right amount. Pausing distributions is pretty common during times like these and can be done long before a deal is in jeopardy but thankfully it hasn't been necessary in our case. 

If you are serious about the business and want to shine like a pro so you can attract more capital you need a portal like IMS or Syndication pro. You really need a system to scale and take your business to the next level.