What is a preferred return and waterfall structure in a multifamily syndication?
In a multifamily syndication, a preferred return is a specific rate of return that is paid to the investors before any profits are distributed to the sponsors or general partners. The preferred return is typically expressed as a percentage of the invested capital and is paid on a regular basis, such as quarterly or annually. The preferred return serves as a minimum return for the investors and is designed to provide a level of security and predictability in the investment.
A waterfall structure is a method for distributing profits among the investors and sponsors in a multifamily syndication. The structure typically starts with the payment of the preferred return to the investors, and any remaining profits are then distributed according to a predetermined set of rules. These rules, also known as the "waterfall," can vary depending on the specific terms of the syndication agreement, but they typically outline the order in which profits are distributed and the percentage of profits that each party is entitled to receive.
For example, in a common waterfall structure, the sponsors or general partners may be entitled to receive a percentage of the profits after the investors have received the preferred return and any other agreed-upon returns. The remaining profits may then be distributed to the investors on a pro rata basis, based on their percentage ownership in the investment.
The preferred return and waterfall structure are important considerations in a multifamily syndication, as they can affect the overall return on investment for the investors and the profitability of the project for the sponsors. It is important to understand these terms and how they will be applied in the investment before committing to a syndication.