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May 2024 | Volume 13

KNOWLEDGE HUB: INSIGHTS AND INFORMATION

Understanding Capital Returns in Syndications: Cash Flow, Refinances, and Sales

 

Investing in syndications offers a variety of mechanisms for returning capital to investors. These mechanisms are essential for understanding how your investments will generate income and eventually return your initial capital. This article delves into three primary methods syndications use to return capital: cash flow distributions, refinancing, and sales of assets.

 

1. Cash Flow Distributions

One of the most straightforward and appealing methods of capital return in syndications is through regular cash flow distributions. These distributions typically come from the net operating income (NOI) generated by the asset.

How It Works:

  • Rental Income: For real estate syndications, rental properties generate monthly or quarterly rental income. After deducting operating expenses and debt service, the remaining net income is distributed to investors.

  • Preferred Returns: Many syndications offer a preferred return, ensuring that investors receive a predetermined return on their investment before any profits are shared with the general partners. This preferred return provides a safety cushion, ensuring investors receive steady income before the sponsors take their share.

Benefits:

  • Regular Income: Investors benefit from a steady stream of income, enhancing liquidity and providing a predictable return.

  • Early Return on Investment: Regular cash flow helps in recovering part of the invested capital sooner rather than later.

     

2. Refinancing

Refinancing is a strategic approach that allows syndications to return a portion or all of the investors' capital without selling the asset. This is particularly common when the asset has appreciated in value or when favorable financing terms are available.

How It Works:

  • Increased Property Value: Over time, the property’s value may increase due to market appreciation, improvements made by the syndicate, or increased rental income.

  • New Loan: The syndicate takes out a new loan based on the higher property value. The proceeds from this new loan are used to pay off the existing mortgage and return capital to investors.

  • Maintained Ownership: Investors retain their equity stake in the property, continuing to benefit from future cash flows and appreciation.

Benefits:

  • Return of Capital: Investors can recover a significant portion of their initial investment while still holding an ownership stake.

  • Tax Efficiency: The proceeds from refinancing are generally not taxable, as they are considered loan proceeds rather than income.

 

3. Sale of Asset

Selling the asset is the most definitive way to return capital to investors and often occurs at the end of the syndication’s lifecycle.

How It Works:

  • Disposition: The property or asset is sold, ideally at a higher value than the purchase price, capitalizing on market appreciation and value-add strategies implemented by the syndicate.

  • Proceeds Distribution: The proceeds from the sale are used to pay off any remaining debts and expenses. The remaining profits are then distributed to investors, usually after meeting any preferred return thresholds.

Benefits:

  • Significant Returns: Sales typically provide a lump sum return, which can include the return of initial capital plus substantial profits.

  • Completion of Investment Cycle: This method provides a clear endpoint for the investment, allowing investors to realize the full return on their investment and reinvest in new opportunities.

 

Conclusion

Understanding these methods—cash flow distributions, refinancing, and sales—is crucial for investors in syndications. As described in the last newsletter, Lonicera has used both cash flow and a refinance of Lonicera Fund I to return all of the investors' capital. Each of these three methods will be used in each Fund to ensure their capital is returned to them. By employing these strategies, Lonicera aims to provide consistent and reliable returns, maintaining investor confidence and satisfaction throughout the lifecycle of each investment.

COMMERCIAL LEASING OUTLOOK

 

Commercial leasing is experiencing a notable resurgence, with current trends indicating that it is on track to meet or exceed leasing activity levels seen in 2022 and 2023. This uptick is driven by increased demand across sectors, improved economic conditions, and a growing confidence in the commercial real estate market. As businesses continue to expand and seek new spaces, the commercial leasing market is poised for a robust performance, reflecting a positive outlook for the remainder of the year.

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WHAT THE TEAM IS READING

Article by Alyssa Mercer

"The Complete Guide to Real Estate Finance for Investment Properties" by Steve Berges provides essential tools for evaluating and managing real estate investments. The book covers financial analysis methods like cash flow analysis, net present value (NPV), and internal rate of return (IRR) to determine profitability. It explains valuation techniques such as the income approach, sales comparison approach, and cost approach. Berges discusses various financing options, including mortgages and creative financing, emphasizing leveraging these to maximize returns.

Real-world case studies illustrate the practical application of financial concepts, while risk management strategies and effective property management techniques are highlighted to ensure long-term success. The book also delves into tax considerations, offering strategies to enhance after-tax returns, and outlines various investment strategies, from buy-and-hold to fix-and-flip. Overall, this comprehensive guide equips investors with the knowledge and tools needed for informed and profitable real estate investment decisions.

FUTURE OUTLOOK

The Peak Opportunity Fund is open for investment! Comprising 1,200,000 square feet of prime industrial, office, and flex warehouse space, this fund boasts an impressive $41.5 million asset value and currently maintains an impressive 85% occupancy rate. Spanning across key locations including Minneapolis, Minnesota, Cleveland, Ohio, Mobile, Alabama, and Paris, Kentucky, the Peak Investment Fund promises lucrative prospects. Projections indicate an estimated 20% Internal Rate of Return (IRR), 13% cash on cash return, and a remarkable 2.3 equity multiple.

If you have any questions about Lonicera Investments, our past performance, or our future, please reach out. We would be happy to sit down with you and answer any questions you have! 

ANY ESTIMATES OR PROJECTIONS AS TO EVENTS THAT MAY OCCUR IN THE FUTURE, INCLUDING PROJECTIONS OF REVENUE, EXPENSE AND NET INCOME CONTAINED IN THIS VALUATION SUMMARY OR ANY OTHER OFFERING DOCUMENTS, ARE BASED UPON THE BEST JUDGMENT OF THE COMPANY’S MANAGEMENT AS OF THE DATE OF THIS VALUATION SUMMARY OR THE APPLICABLE OTHER OFFERING DOCUMENT. WHETHER OR NOT SUCH ESTIMATES OR PROJECTIONS MAY BE ACHIEVED WILL DEPEND UPON THE COMPANY ACHIEVING ITS OVERALL BUSINESS OBJECTIVES AND THE AVAILABILITY OF FUNDS. THE ESTIMATES AND PROJECTIONS NECESSARILY MAKE NUMEROUS ASSUMPTIONS WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS AND ECONOMIC CONDITIONS, TAXES AND OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. THERE IS NO GUARANTEE THAT ANY OF THESE PROJECTIONS WILL BE ATTAINED. ACTUAL RESULTS MAY VARY FROM THE PROJECTIONS, AND SUCH VARIATIONS MAY BE MATERIAL. THE COMPANY HAS NO OBLIGATION TO UPDATE OR OTHERWISE REVISE THE ESTIMATES OR PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING OR DEVELOPMENTS OCCURRING AFTER THE PREPARATION OF THE ESTIMATES OR PROJECTIONS OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

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