Question Regarding Reserve Accounts for Syndications

[Jordan Archer]

Hi BP,

When using syndication to purchase an investment property, I understand that you would normally pay your LP's between 8% - 10% preferred on their investment, and then split the excess (somewhere between 50/50 - 70/30).

In regards to the initial reserve account you would establish for the project, how would you structure a pay back for this? Also, do the limitted partners get the same 8% - 10% preferred return on this capital as well? 

Running through it in my head, I would assume that for the first year of the project you would take the excess profit (after the 8 - 10% preferred return), and use that to displace the money in the reserve account. Once the reserve account has been displaced, and the investors have their capital back (designated for the reserve account), you would commence with the 70/30 split (or similar). Is this correct?

[Brian Burke]

Reserves get distributed back when the property has sold.  Funds allocated to reserves are treated the same as funds raised for any other purpose.  The threshold to meet a preferred return hurdle includes all contributed capital, regardless of what it is used for.