Multifamily Syndication Refinance Implications for LP Investor

[Jordan Burnett]

Hey guys,

I'm looking for some guidance on how to know what the implications of a refinance are for a Limited Partner in a multifamily (or other) syndication offering. If it's not explicitly stated in the PPM, is the expectation that a limited partner will retain their existing ownership stake and equity split in the deal after a refinance? 

Where would this language typically be in a PPM, and what language have you typically seen in offerings that spells this out? 

I have seen language in regards to preferred return and distributions upon refinance, but not in relation to ownership stake. 

I have read Brian Burke's latest book and he mentions that some sponsors may "buy out" your ownership position in the deal upon a refinance, which would eliminate the desired "infinite return" that comes from a refinance. 

Thanks in advance. 

[Arn Cenedella]

@Jordan Burnett

That’s an excellent question and you are on the ball to ask it.

I would ask the sponsor directly and have them point you to the specific section in the PPM that addresses this issue. Get their response in writing.

I am still educating myself about syndications and you should receive more informed answers than mine.

With that caveat, here is my take:

Any cash distribution to you from a refinance would be considered a return on investment and therefore reduce your investment in the project. Your actual dollar amount of preferred return would then be reduced because your investment amount has been reduced. That being said, if the project started with a 70/30 split, the 70/30 ratio should remain in place. Under this scenario, the sponsor would also get the 30% share of the refinance proceeds.

The other issue to consider is whether the regular distributions are considered return OF or return ON investment. I prefer they be treated as return ON.

Let’s see what other more experienced folks say. I write the above simply to express my opinion and to test my knowledge. If I am wrong, then I am happy to be educated and learn something which is the whole point of the BP forum to help investors educate themselves.