How do you get paid in a syndication?

You invested in a real estate syndication with the expectation that you would get paid. You wanted, for sure, to get your capital back--a return of capital. But you also expect that you would get paid for taking the risk of putting your money in a deal of this sort--a return on capital.

So how does that work, exactly, in a typical deal?

Today we read back through dozens of deals that we have invested in. Of course, deals can differ in terms of how you get paid. You can invest in a type of deal that just gives you a set percentage of your investment every month. You can invest in deals that give you no monthly cashflow but give you a pile of money at the end of the deal. Or you can invest in something that pays you both. We tend to prefer the "both" model but there are good reasons why you might choose one or the other.

Let's start with the "cash flow only" type of arrangement. Many real estate syndications break their deals up into classes of equity. A typical scenario is to have a Class A of limited partners who just receive monthly cash flow (at a higher rate of return) and a Class B of limited partners who receive monthly cash flow (at a lower rate of return) as well as a return on equity if the deal is ultimately successful. Sometimes investors are also invited to participate in both classes at once--a blended type of investment.

In the past few years--2020 to 2022--a typical Class A offering might provide a 9% annual return on investment. We have one that offers 10%. There are potentially higher or lower returns on offer, depending on the deal, market, syndicator, and so forth. Once the deal is sold, the Class A investors are simply given their capital back--no return on capital, but a return of capital (presuming the deal did not lose money).

A typical Class B offering might provide a return of 8% annual return on investment in monthly or quarterly cashflow. We have one that pays out semi-annually. Others are more sporadic. Typically--though you have to check the fine print--if a deal does not pay out every month or quarter or six months, those returns are "accrued"--kept on the books as a debt to you, the investor, but not actually paid out. When the deal ultimately sells or has a liquidity event, you might receive a "catch up" payment for that accrued monthly return that was not paid out as well as a return of and on your investment.

In these Class B offerings, what might you expect in terms of a return? It is often measured in terms of a split. Depending on how much you put into the deal, you might get, say, a 70/30 or 75/25 split of the profits after everyone's capital is returned. This gets to the complicated topic of how the "waterfall" works (a topic for another blog post). But for sure, it should matter to you what the "split" is between you, the limited partner, and the general partners. We've seen recently a deal as low as 65/35 and one as high as 80/20. Again, it can depend on the deal, how much you are putting in, and so forth.

No matter what the promised economics of a deal look like, what matters most is the performance of the asset and the operator. You can be promised the world and have the deal stink; in that case, you can lose your entire investment. You can be promised a slimmer slice of the profits then see the deal outperform like crazy--and you make out far better than you imagined. So, we always focus on the underlying asset, market, and operator more than the deal terms. But there is no need to leap at a deal with lousy deal terms, so shopping around and understanding the terms that are typically on offer always makes sense.