Do you stay in the syndicated deal once a refinance occurs?

[Rick Martin]

Do you stay in the syndicated deal once a refinance occurs? There is trepidation amongst limited partners that a refinance means getting bought out or having one's shares diluted. This can happen, so ask the operator how a refinance affects your ownership.

I cannot speak for all syndicators, but when we refinance, the limited partners stay invested in the deal. The total amount they receive from the preferred return distributions does drop because they are now earning their preferred return on the less principal they have in the deal. Their equity split – let's assume a 70/30 split – remains; thus, they still receive 70% of the profits.

Example:

If you invested $100,000 into a deal with an 8% preferred return, you'd expect to receive $8000 annually. After a refinance- let's propose a 30% return of capital - you are returned $30,000, so you have $70,000 of your original principal invested in the deal. The preferred return is 8% on the remaining $70,000, or $5,600. You can still earn above the 8% preferred, but whatever remains is split 70/30 with the General Partners. 

If you earned $7000 in a year, the first $5600 would be your 8% pref ($5600 ÷ $70,000 = 8%). The remaining $1400 would be your 70% cut/split of the remaining cash flow for that year.

Since the refinance doesn't affect the profit splits, you'll still get your 70% split of the profits after a sale. So if there were $10M profit after a sale, $7M would go to the LPs.

There are many ways to structure a deal, so make sure it aligns with your interests. I hope it helps.