Returns for passive investing in MFH syndication

[James Thiel]

HI All,

I am considering investing in a MFH syndication with a proven operator doing a value-add project. My initial thought is whether I like the way they structure investor returns.  They have an 8% preferred return with a 4% accumulation/annualized appreciation.  I normally see similar preferred coc returns, but tend to see a split (60/40, 70/30, etc. in favor of investor) of any cash flow overages. Has anyone seen this structure before? Obviously, it will depend on project performance but how might it impact returns compared to the typical % of overage structure? Maybe better, maybe worse? Depends I know, but hoping some folks can share experience/insights on this.

Thanks!  

[Brian Adams]

@James Thiel, I know we briefly spoke offline, but I wanted to share my perspective with you as an active Sponsor since I have syndicated several large deals before. 

Some of my opportunities have been an offering of a pref return plus back-end and other deals similar to the structure you shared above with a capped return.

Each opportunity has its own "story" based on the respective deal fundamentals.

Since I am working on a totally different deal, but similar deal structure you outlined above, and please know that the following should not be construed as an offering or an open solicitation.

With my deal I am very confident in my projections. 

However the real estate market is changing with the potential for tax reform, already rising interest rates, and the potential increases in cap rates long term.

With higher interest rates, cap rates go up, and values drop.

I believe there is more certainty and less overall risk by front loading investor returns as we continue to move through the current market cycle.

I also believe the risk to the investor is being lowered by utilizing 3 years of interest only financing, which allows stronger front-end cash flow. However, this lowers back end profits as the debt service is higher when I intend to sell than it would be otherwise.

Not all investors will like the structure of not sharing in the back-end. In this particular deal the capital raise is $10 million and it is almost funded. In summary though, I want to be prudent and cautious as we move through this market cycle. For me, and since my background is a CPA and generally more risk adverse, I am very grateful that my investors respect and trust that I have their best interest in mind.

I hope the above is helpful to you. You may want to ask your Sponsor why they structured their deal this way and hopefully you will like what they have to say. 

Good luck!!