What is a Preferred Return?
In the context of a real estate syndication, a preferred return (pref) is a return that is paid to investors before any other distributions are made. This means that if a real estate syndicate generates profits, the pref is paid to investors first, before any other distributions are made to other investors or the sponsor of the syndication.
A preferred return is typically structured as a fixed percentage of the investment amount. For example, a preferred return of 8% means that investors will receive an annual return of 8% on their investment before any other distributions are made. If the syndication generates a profit of 10%, investors will receive their preferred return of 8% plus their portion of an additional 2% return.
The pref is designed to provide a level of certainty and stability for investors. By ensuring that investors receive a fixed return before any other distributions are made, investors can have greater confidence in their investment and the GP team. This can be particularly important in real estate investments, where returns can be uncertain and depend on factors such as property values, rental rates, and occupancy levels.
Please note that a preferred return does not guarantee that investors will receive a return on their investment. If the syndication does not generate enough profits in a given year to cover the preferred return, investors may not receive all or any returns at all. Additionally, preferred returns may or may not be cumulative or accrue, meaning that if a syndication fails to pay a preferred return in one year, investors may or may not receive that missed payment in future years.
While a pref isn’t necessarily a guaranteed return, it is as close as you’re going to get to one. Prefs are a great tool for mitigating risk in a syndication investment. If investors don’t make money, neither do we.
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