Questions on Preferred Rate of Return in Syndication Deals

[Brian Lucier]

Hello BP Multi-Family Peers,

Quite a few books ago I read @JoeFairless "The Best Ever Apartment Syndication Book". Fabulous book with step-by-step checklists and procedures to create a syndication business from the ground up. Took a lot of notes and enjoyed the journey. Well on my way down that road but there was a nugget from the book I have still yet to crack open.

There was a specific topic in the book that I researched from cover to cover and cannot seem to wrap my head around. I finally got around to posting my question here on the Multi-Family Forum and would love to get some guidance and clarification.

I understand the concept of a "Preferred Rate of Return" to the Limited Partners. This is a pre-designated rate of return the LP investors will receive before any other distributions will be paid to the General Partners. This seems like a great perk to entice LP investors into the deal and in alignment with our goals to protect our their investment in the deal, and make more money.

What is unclear to me is the actual "terms" of the Preferred Rate of Return? Could not seem to find clarification for the length of the term in the book? A few questions to help clear up my confusion...

Let's go with an 8% preferred rate of return for a simple example.

On a $100K investment this would represent an $80,000 PRR to the LPs before any other distributions are allowed. But what is the exact length of time for this term? Is this in effect until the entire $80,000 is paid in full? For example, if the distribution was $8,000 a month (or whatever the distribution schedule predetermined), it would take 10 months to pay back the PRR. Then, does is the PRR satisfied and the term end?

Is that how the term PRR works?

Again, are the distributions paid to accumulate until the PRR is reached, then the normal GP/LP split kicks in? Or does the term of the PRR work differently? Other online definitions imply per annum PRR. Does this mean the 8% has to be achieved year after year, then the normal GP/LP split resets each year? 

We currently are not offering PRR in our deals, but it seems it would be an attractive option to our investors. Can anyone shed some light on this and help our investors make more money?

Greatly appreciate your help in advance!!