What Happens When Preferred Returns Fall Short in a Real Estate Syndication

If you promise, let’s say an 8% preferred, and in year one, you give all the money to all the distributable cash investors, but they only get a 4%. So you’re short four. There’s a couple ways that gets dealt with. The common way I believe is that it would just roll over to the next year. So the next year, you owe me the 4% that you owe me from the prior year, plus my 8% preferred this year. And if you’re short again, then the next year, you owe me the eight from that and whatever, it just keeps going that way. Other people, I have seen it, it’s not as common, but they just deal with it at the end. It’s like, hey, we owe you that 4%, but we’re not going to pay to you next year. We’re going to pay to you on the backend, when we sell or refinance in our waterfall, we’re going to give all the money back to the investors first. Then we’re going to give all the money to the investors to catch up on whatever we owe them on the prep. And then we’re going to split it, whatever the splits are.