Episode 30: Distributions 101 – When & How You Get Paid

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create true financial freedom through passive commercial real estate investing. I'm Wayne Courageous III, founding and managing principal of Crei Partners, a leading commercial real estate company, I created CreiCollen, an AI powered resource to serve as your investor education guide. Built on the insights and experience we've developed at Crei Partners, CreiCollen is here to educate you through passive invest tax strategy topics to help your journey in passive investing. Just a quick disclaimer. This podcast and CRA Colin is for educational purposes only and is not legal tax or investment advice. Always consult with your attorney, CPA and financial advisor before making any investment decisions. I've spent nearly two decades helping investors understand the power of commercial real estate, from multifamily to storage to retail. Each episode is under 15 minutes, simple to follow and and packed with insights to help you grow your income and protect your capital without becoming a landlord. If you're ready to learn quickly and invest smarter, you're in the right place. Welcome to Building Passive Income. Let's build wealth together. Here's creicollen.

When and how you get paid Revised Here's a question I get all the when do I actually get paid? It's a simple question, but the answer is more nuanced than most investors realize. In a real estate syndication, you get paid in two ongoing distributions from cash flow during the hold period and proceeds distributions at the sale or refinance. But the timing, frequency and amount of those distributions depend on the deal structure, the the property's performance, and the waterfall. Some deals distribute quarterly, some distribute monthly, some don't distribute at all during the hold period and return everything at the sale. And here's the thing. Understanding how and when you get paid is critical to managing your cash flow, planning your taxes, and evaluating whether a deal aligns with your investment goals. I'm Crei Collin and this is Building Passive Income, where we give you the strategies to build real wealth through passive real estate investing. Distribution patterns vary widely, and none of these structures are inherently good or bad. The goal is understanding how each one works. Today, we're breaking down distributions. You'll learn the difference between cash flow distributions and proceeds distributions, how distribution frequency works, what affects distribution amounts, and how to evaluate whether a deal's distribution profile matches your goals. Let's dive in the two types of distributions In a real estate syndication, there are two types of cash flow distributions and proceeds distributions. Cash Flow Distributions Cash flow distributions come from the property's ongoing operations. Rent comes in, expenses go out, debt service is paid, and whatever's left is distributable cash flow. This cash flow is distributed to investors based on the waterfall structure we covered in episode 26. In many structures, cash flow is first applied toward the LP's preferred return, though the exact mechanics depend on the operating agreement. Preferred returns vary by deal and strategy and are often in the mid single digit range. In many value add deals, any additional cash flow beyond the preferred return is typically split between the GP and LP based on the profit split such as 70:30 cash flow distributions are typically paid quarterly, though some sponsors distribute monthly or semi annually. Here's the Cash flow distributions are not guaranteed. They depend on the property's performance. If the property underperforms, cash flow distributions may be lower than projected or 0. Proceeds Distributions Proceeds distributions come from a capital event, either a sale or a refinance. At a sale, the property is sold, the lender is paid off, and the remaining net proceeds are distributed to equity investors based on the waterfall. At a refinance, the property is refinanced with a new loan, often at a lower interest rate or higher loan amount. The difference between the old loan balance and the new loan amount minus closing costs is distributed to equity investors, often as a return of capital, depending on the structure. Proceeds distributions are often larger than periodic cash flow distributions depending on how the deal performs, because they can include the return of your initial capital plus your share of the profit from the sale or refinance. Your Action Step when reviewing a deal, identify whether the projected returns are weighted more toward cash flow or proceeds. A cash flow focused deal might distribute steady returns annually with a smaller gain at sale. A proceeds focused deal might distribute little to no cash flow but deliver a large return at the sale. Section 2 how distribution frequency Works Distribution frequency refers to how often cash flow distributions are paid. Distribution frequency depends on sponsor policy, lender requirements, and the stability of the property's cash flow. The most common distribution frequencies are quarterly distributions. This is the most common structure. Cash flow is distributed every three months, typically within 30 to 45 days after the end of the quarter. For example, Q1 distributions are typically paid in April or May. Quarterly distributions are common because they give sponsors enough time to close the books, reconcile accounts, and calculate distributable cash flow monthly distributions. Some sponsors distribute cash flow monthly. This provides more frequent income but requires more administrative work. Monthly distributions are more common in stabilized core assets with predictable cash flow. They're less common in value add deals where cash flow is reinvested into renovations during the early years. Semi Annual or annual distributions Some deals distribute cash flow semi annually, twice a year, or annually. This is less common and typically occurs in deals where cash flow is being reinvested into the property during the early years. No distributions during hold Period in some deals, particularly development deals or heavy value add deals, there are no cash flow distributions during the hold period. All cash flow is reinvested into the property and investors receive their returns entirely at the sale or refinance. This structure is appropriate for deals where the business plan requires significant capital reinvestment, but it means you won't receive any income until the property is sold or refinanced. Your Action Step before you invest, confirm the distribution frequency. Ask yourself, does this align with my cash flow needs? If you're investing for passive income, a quarterly or monthly distribution schedule is ideal. If you're investing for long term appreciation, a no distribution structure may be acceptable. What Affects Distribution Amounts? Distribution amounts are not fixed. They fluctuate based on the property's performance and the deal structure. Here are the key factors that affect how much you receive in property Performance if the property exceeds projections Higher occupancy Higher rents Lower expenses distributable cash flow increases and your distributions increase. If the property underperforms, higher vacancy Lower rents Higher expenses Distributable cash flow decreases and your distributions decrease or stop entirely. Reserve Fund Usage if the sponsor needs to use reserve funds to cover shortfalls, less cash is available for distributions. Conversely, if the property performs well and reserves aren't needed, some sponsors may distribute unused reserves to investors at the sale or during the hold period. Debt Service the loan payment is the largest fixed expense on most properties. If the loan has a variable interest rate and rates increase, debt service increases, which reduces distributable cash flow. Capital Improvements during the value add phase, cash flow is often reinvested into renovations rather than distributed to investors. Once the property stabilizes, cash flow distributions typically increase. Waterfall Structure as we covered in episode 26, the waterfall defines how cash flow is distributed. If the deal has a cumulative preferred return, you receive your preferred return before the GP takes any profit split. If the property doesn't generate enough cash flow to cover the preferred return, the unpaid amount accrues and must be paid before the GP takes any promote GP decisions. Some operating agreements give the GP discretion over distributions. The GP may choose to retain cash flow in the deal's operating account as additional reserves rather than distributing it to investors. If discretion is broad or undefined, it's worth understanding the guardrails and decision criteria. Your Action Step when when reviewing a deal's projected returns, remember that distributions are projections, not guarantees. Ask the sponsor what assumptions are you using for occupancy, rent, growth and expenses? How have your past deals performed relative to projections? How Proceeds Distributions Work at a Sale at the sale, the distribution process is more complex because it involves paying off the lender, settling closing costs and distributing net proceeds to equity investors. Based on the waterfall. Here's how it typically Step one Sale closes the property is sold and the buyer's funds are deposited into escrow. Lender is paid off. The first priority is paying off the existing loan. The lender receives the outstanding loan balance plus any prepayment penalties or fees. Step 3 Closing costs are deducted Closing costs such as broker commissions, title fees, legal fees and the sponsor's disposition fee are deducted from the gross sale proceeds. Step 4 Net proceeds are calculated what's left after the lender is paid and closing costs are deducted? Is the net sale proceeds available for distribution to equity investors? Step 5 Waterfall is applied the net proceeds are distributed to equity investors based on the waterfall structure outlined in the operating agreement. The exact order of preferred return and return of capital can vary, but particularly at a sale and is defined in the operating agreement. A typical waterfall might look like Tier 1 pay any accrued but unpaid preferred return to the LP's Tier 2 return LP capital contributions. Tier 3 split remaining profit between GP and LP based on the agreed upon percentage such as 70 30. If there's a catch up provision, the GP may receive an allocation that allows them to reach their promoted interest before the ongoing Split applies. Step 6 distributions are issued Distributions are issued after closing and final accounting, which can take several weeks or longer depending on complexity. Once all accounting is finalized and tax documents are prepared, your Action Step when reviewing a pm, look at the projected sale proceeds distribution. Understand how the waterfall applies and what your expected return is based on the sponsor's projections. Section 5 refinance distributions returning Capital without Selling A refinance distribution occurs when the sponsor refinances the property and distributes proceeds to investors, often as a return of capital. Depending on the structure, here's how it the property has performed well. Occupancy is up, rents are up and NOI has increased significantly. The sponsor refinances the property with a new loan at a higher loan amount based on the increased value and noi. The difference between the new loan amount and the old loan balance minus closing costs is distributed to investors, often as a return of capital depending on the deal structure and tax circumstances. For example original loan balance $6 million new loan amount $8 million closing costs $200,000 distributable proceeds $1.8 million if you invested $100,000 and own 5% of the LP equity you earned, you might receive $90,000 as a distribution from the refinance. Here's the benefit you receive a large portion of your capital back without selling the property. The deal continues, you continue to receive cash flow distributions, and you still participate in the upside at the eventual sale. Here's the risk the property now has a higher loan balance, which means higher debt service. If the property underperforms after the refinance, cash flow distributions may decrease and and the deal may face financial stress. Higher leverage can also increase covenant risk or reduce flexibility if market conditions change. Refinance distributions can be a great way to de risk your investment and return capital to investors, but they should only be executed when the property's performance supports the higher debt load. Your Action step if the sponsor projects a refinance as part of the business plan, what are the refinance assumptions? What will the new loan balance be? How will the higher debt service affect future cash flow distributions? What are the covenant requirements and refinance risks? Evaluating Distribution Profiles does this deal match your goals? Not all deals have the same distribution profile, and not all distribution profiles are right for every investor. Here's how to evaluate whether a deal's distribution profile matches your if you need passive income, look for deals with quarterly or monthly cash flow distributions and a stabilized asset class such as core or core plus. Multifamily target deals projecting steady annual cash on cash returns from operations. These ranges are illustrative examples, not guarantees, and actual results depend on execution and market conditions. Avoid heavy value add or development deals with no distributions during the hold period. If you're focused on appreciation, look for value add or opportunistic deals that reinvest cash flow into the property during the early years and deliver the majority of returns at the sale. Target deals projecting higher total returns with a focus on equity multiple appreciation Remember, these are examples based on historical performance in various strategies, not guarantees. Be comfortable with little to no cash flow during the hold period. If you want a balanced approach, look for moderate value add deals that distribute modest cash flow during the hold period and deliver additional returns at the sale. Target deals projecting a combination of regular distributions and meaningful upside at exit. If you're investing through a retirement account, remember that distributions from a syndication held in a self directed ira or Solo 401. Remain in the retirement account. You won't receive the cash personally until you take a qualified distribution from the account. Your Action Step before you invest, ask yourself, what am I trying to achieve with this investment? Do I need passive income now or am I building long term wealth? Does this deal's distribution profile align with my goals? Recap and Action Steps alright, let's recap. Distributions are how you get paid in a real estate syndication, and understanding when and how you get paid is critical to evaluating whether a deal aligns with your goals. Here's what you need to 1. There are two types of cash flow distributions from operations and proceeds distributions from a sale or refinance. 2. Distribution frequency varies. Quarterly distributions are most common, but some deals distribute monthly, semi, annually, or not at all during the hold period. 3. Distribution amounts depend on property performance, reserve fund usage, debt service, capital improvements, the waterfall structure, and GP decisions. 4. At a sale, net proceeds are distributed based on the waterfall, with the exact order of preferred return and return of capital varying by the operating agreement. 5. Refinance distributions return capital to investors without selling the property, but they increase the property's debt load and should be evaluated carefully. 6. Evaluate whether a deal's distribution profile matches your goals. If you need passive income, prioritize deals with regular cash flow distributions. If you're focused on appreciation value, add deals with proceeds. Focused returns may be a better fit. Here's your action step. Pull out the PPM from one of your current syndication investments. Find the sections on distributions, identify the distribution frequency, the projected cash on cash return, and the projected proceeds distribution at sale. Ask yourself, does this distribution profile align with my investment goals? If you're ready to build a diversified syndication portfolio with sponsors who deliver transparent, consistent distributions, let's talk. Check the Show Notes for a link to schedule a call with us@creipartners.com that wraps up our deep dive into syndication economics. Over the past five episodes, we've covered equity waterfalls, GP versus LP economics, sponsor compensation, capital calls and distributions. You now have the knowledge to evaluate deals like a pro. Until next time. Remember, financial freedom isn't a dream, it's a decision. And it starts with understanding when and how you get paid. I'm Crei Collin. Let's build wealth together thanks for tuning

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