I read the 9 percent as a payment schedule. It was a target.

First time putting money into a crowdfunded deal instead of swinging a hammer on my own project. $5k into a value-add apartment deal on a platform, 82 units, plan was renovate units as they turn and refinance in year three.

The deal page said 9 percent preferred return, quarterly distributions. In my head that was $112 a quarter showing up like a paycheck, and the equity upside was gravy on top. I got two payments. Month 7 the sponsor's quarterly update said distributions were being suspended so cash could go into the renovation budget and to cover higher insurance than they'd underwritten.

Eighteen months in now and I've received nothing since. The updates are honest enough, occupancy is fine, the renovations are getting done slower than planned. Nobody has done anything wrong that I can see. I just misread the product.

What I actually didn't understand: preferred return means I sit ahead of the sponsor in line for profits up to 9 percent a year, and if the property doesn't generate cash, there's no cash to send me. In this deal it accrues, so the unpaid amount piles up and is supposed to be paid out of a refinance or a sale before the sponsor takes their split. Some deals accrue and some don't, and it says which in the documents I skimmed.

Money is not lost. It's parked with an IOU attached and no date.

What I'd do differently: before funding, find the sentence that says whether the preferred return is paid in cash from operations or accrued, and find out what the first year of projected cash flow actually covers. If a deal's own numbers only just cover the distribution in year one, the distribution is a hope.

2 replies

0tylerbrooks9PassivePRO5

This is the exact thing I was scared of, so thank you for writing it plainly. I wanted the boring income version and I've been going back and forth between deals like yours and just buying a plain index-ish pooled thing.

One question because I genuinely don't know. If the accrued amount is supposed to get paid at refinance or sale, and the refinance slips two years, does the accrual keep compounding or does it just sit there as a flat number? I've seen the word cumulative used and I can't tell if that means the same as compounding.

1angela_burkeServicePRO6

verity, cumulative means the unpaid amount carries forward instead of resetting each year. Whether it also compounds, meaning you accrue on the unpaid accrual, is a separate line in the agreement and the two get written a dozen different ways. Read the waterfall section.

girder, the insurance overrun is worth sitting with. On the renovation jobs my crew has been on, insurance and materials were the two lines that moved the most between when a budget was written and when the work started, and a plan that only pencils if both hold is a plan with no room in it. You can spot that from the outside by asking what the sponsor's contingency was as a percentage of the renovation budget. Under 5 percent on unit turns and I'd want an explanation.

I read the 9 percent as a payment schedule. It was a target.

2 replies