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Is a 7 percent pref with a 70/30 split better than an 8 percent pref with an 80/20 split at my expected hold

I keep running the numbers on two deals I'm looking at and the answer keeps changing depending on what I assume the final sale price is. Deal A is a 48-unit in Huntsville, $50k minimum, 7 percent pref, 70/30 split above it, projected 5-year hold, sponsor underwriting a 1.55x EM. Deal B is a 32-unit in Columbus, same $50k minimum, 8 percent pref, 80/20 split, 4-year projected hold, sponsor underwriting a 1.48x EM. At the sponsor's own projections, Deal A clears about $76,500 on a $50k check and Deal B clears about $70,400. So Deal A wins on paper, but I am putting a lot of faith in that extra year of appreciation and a stronger exit multiple. If I stress the exit down 10 percent on both, Deal B holds up better because the higher pref cushion does more work when the upside compresses. The thing that keeps nagging me is that the 70/30 in Deal A means I am leaving more on the table if the sponsor actually threads the needle on that exit cap rate, which their last two deals suggest they might. My total allocation right now is $150k set aside for LP positions, so this $50k is a third of it on one check. I have not committed to either yet and close dates are 6 weeks out on Deal A and 10 weeks on Deal B.

1 reply

The extra year of hold is the part that's bitten me hardest, not the split math.

2019 I was in a 5-year projected hold in Tempe that stretched to seven, and the carry on that dead year ate about $6,200 I'd already mentally spent.

Columbus at 4 years is a real number right now given where debt markets are sitting.

The 80/20 doing more work under stress is the only math that matters to me personally.

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