Clarification on apartment syndication splits

[Stephanie Martinson]

Hi everyone,

I'm analyzing an apartment building, and while doing so, I got to thinking about a question that I had better clarify before going in to further discussion with passive investors...  

For my business plan, I'm thinking an 8% preferred return, and then I'm not 100% sure about the profit split, but since it's my first deal, I thought a 70/30 profit split would be fair.  

My question is this: is the profit split each year after the passive investors get their 8%, then we split the cash flow profit 70/30, and then again on the sale?  Or is the profit split ONLY on the sale of the property?  

Thank you for all your help!

Steph Martinson

[Theo Hicks]

Profit split is cash flow above 8% and profit from sale.

A good strategy is to distribute 8% each month/quarter no matter what. Then at the end of each 12 month period, distribute the extra profits then. For example, let's say the deal cash flows 10% year 1, you distribute the 8% each month/quarter. Then at the end of 12 months, when you determine that you cash flowed 10%, you distribute 70% of 2% (so 1.4%) at that time. Keep in mind that any cash flow above 8% is considered a return of capital. So the capital balance is reduced. You can either do 8% pref on the new capital balance or continue to distribute 8% based on the initial capital balance and catch up at sale.

Also, the sales profits are the profits after all closing costs, paying back the remaining debt, and returning the investors' remaining equity.