LP COC Calculations

[Balkar Singh Kang]

I'm currently immersed in "The Multifamily Millionaire" Vol II by Brian Murray and Brendan Turner. On Page 235, a calculation for Cash-on-Cash (COC) return for Limited Partners (LP) caught my attention. I'm seeking assistance to understand the correct percentage.

Consider the following scenario:

• Invested Equity: $3,412,095
• Cash Flow after debt service and capex: $243,756
• Limited partner COC return (@ 7% preferred +70% equity share)

Despite these inputs, the calculated COC is reported as 6.66% for the first year. I'm puzzled and would appreciate clarification on how this COC percentage is derived. If anyone could provide insight, it would be greatly appreciated.

[Evan Polaski]

@Balkar Singh Kang, as Joshua notes, there are a lot of ways groups present cash on cash.  You can look at it over different periods and with or without sale proceeds.  It could be for 2023.  It could be average for 5 yrs. It could include sale proceeds or not include sale proceeds.

One thing I want to point out: a 7% preferred return is NOT a guaranteed return by any means.  A preferred return means that you are entitled to 100% of the free cashflow up to that preferred return rate.  There is always a chance that a deal never hits the preferred return rate, and therefore your return will be 100% of the free cashflow, but in theory you may only achieve a 3% annualized return, or even lose money on the investment.  And any GP fees come from cashflow before any distributions are made to LPs.  

I know you are only asking about CoC calculations, but it seems like you are trying to learn a lot more about syndications, and there is a lot to cover and understand. Happy to help, having been working in the private placement space for nearly 17 yrs now.