How do these returns for syndication look?

Question

Someone I'm considering working with and has his own company.

"First all cash flows go to the investors until they recoup their initial investment

Second a 7% preferred return accrues until the properties are stabilized (for the current deals, that is considered 80% occupancy). The cash flows then pay off the accrued 7% preferred return.

Third in perpetuity the cash flows are split 60/40 between the investors and my company."

Jack B. · Answer

Bump. Seems too unproven, too new and too low of a return with too little experience. This is their first MF building of this size. The two others are 15 unit commercial buildings.

Jack B. · Answer

He has been in business for about a year, less actually. We were grad students together and met at commencement...Not exactly super proven. Most of his partners are working full time as realtors.

Ned Carey · Answer

That depends on the risk of the deal. It would seem the the deals currently are less than 80% occupied. Will there be enough cash flow to pay the returns promised. Does the sponsor have experience with this size building and repositioning.

Charles Worth · Answer

@Jack B.

Its not awful but not great. I would need to see the full waterfall to know for sure but it sounds like the pref is trailing off when some milestone is reached. I don't like that so much. They used my money to get there and should thus continue paying me my pref.  However, most structures I have seen do a pref then a payback of investor capital vs. the other way around you see here. Sometimes the pref is on the capital account as it stands on the date the pref is paid which if you got all your money back would be $0 in this case, which means they are doing the same thing just backwards from what I am used to.

The cash flow split to me is light I generally like 70/30 unless the sponsor is very very strong.

Also, do they get anything other than the split, fees? catch-ups on the pref?

This also raises some questions. How are they giving you back your money? Are they assuming a refi? It sounds like they are. Are you getting any money from the time you invest until the refi or its all accrued?

It sounds like they are banking 100% on the refi as it would be typically be a pref on your capital say 8% (8% is more typical and what I would want to see) and then all money returned and then a split.