Investment Model
Namma Apartments invests in apartment syndications as limited partners (LP). The LP is a partner whose liability is limited to the extent of the partner’s share of ownership.
The LP is also referred to as the passive investor for apartment syndication. Namma Apartments generally funds a portion of the initial equity investment. While the LP for syndication may be a single person or multiple people, Namma Apartments will be one LP to the syndication.
RETURN ON INVESTMENT
The limited partners in apartment syndications are typically compensated in the following ways.
PREFERRED RETURN
The preferred return is a threshold return offered to the LP before the GP receives payment. The standard preferred return is 8% of their current capital account (capital account is initially equal to their equity investment). That is, the LP will receive a return of up to 8% before the GP is paid. If the apartment community cash flows 8%, the LP receives the 8% preferred return and the GP does not receive a profit split. If the apartment community cash flows less than 8%, the LP receives a return of less than 8% (and the preferred return may or may not accrue, depending on what is outlined in the PPM). If the apartment community cash flows more than 8%, the LP receives their 8% preferred return and the remaining profits are split between the LP and GP.
Typically, the preferred return is considered a return on capital. That is, the preferred return distributions do not reduce the LP’s capital account.
PROFIT SPLIT
If a preferred return is offered, the remaining profits are split between the LP and GP. each Syndications has different profit splits ratios.
The LP will receive their distributions from the profit split on an ongoing basis during the business plan (if the cash flow exceeds the preferred return) and/or at the sale of the apartment community.
Refinance or supplemental loan proceeds
If the GP refinances into a new loan and/or secures a supplemental loan, the LP will typically receive a distribution that is a portion of their initial equity investment.
Similar to the profit split, the proceeds from a refinance or supplemental loan are typically considered a return of capital. That is, the proceeds reduce the LP’s capital account.