The distribution coverage ratio does not mean what most term sheets imply it means

The FFO-versus-cash gap you are describing is real, but there is a second layer worth separating out. Even distributable cash flow, when a sponsor does publish it, can include proceeds from asset sales or refinancings that the fund classifies as operating cash. A fund selling a property and using the proceeds to fund the current quarter's distribution will often show DCF coverage above one hundred percent while the income-producing portfolio itself is underwater on the distribution. The numerator question matters, and so does asking whether any line in that numerator came from a capital event rather than recurring operations. The structure where this divergence is most dangerous is a non-traded REIT in its accumulation phase, still deploying capital, because the portfolio is not yet stabilized and the distribution is frequently being funded by new subscription proceeds, which no coverage ratio will flag. A DRIP-heavy fund can run this dynamic for years before the numbers clarify. What stage is the fund in, still deploying or fully invested, because that changes which line in the cash flow statement deserves the most scrutiny?

This is a clear and useful breakdown of something that trips up a lot of readers of non-traded REIT materials, so I want to add one layer underneath it.

FFO, funds from operations, is the standard numerator you named, but some term sheets use MFFO, modified funds from operations, which strips out acquisition costs, straight-line rent adjustments, and mark-to-market interest rate swaps on top of the depreciation addback. MFFO was introduced by the National Association of Real Estate Investment Fiduciaries as a closer proxy to economic cash earnings, and for stabilized portfolios it does close some of the gap you are describing. The problem is that MFFO is not standardized across sponsors the way FFO is, so two funds can both say "MFFO coverage of 105 percent" while computing the numerator differently. Asking which line-item definition the sponsor uses gets you further than asking which acronym they cite.

The second thing worth confirming, and I would put this to the sponsor's investor relations contact directly rather than relying on the PPM, is whether any portion of distributions in the trailing period was funded from offering proceeds rather than operations. That practice is legal and disclosed, usually in the financial statements, but it does not appear in coverage ratios at all. A fund paying a five percent distribution while still in the capital-raise phase may be returning your own capital to you and calling it income. The financial statements, specifically the cash flow statement broken into operating, investing, and financing sections, will show whether distributions exceeded operating cash flow.

Everything I have written here is a starting point for your own research, not a substitute for reading the actual documents and, where the legal structure of a specific offering matters, talking to a securities attorney.

What format does the offering you are looking at use to present its cash flow statement, and does it break distributions by source?