What is a Preferred Return?

A preferred return in a private real estate investment syndication is the minimum return an investor must receive before the Sponsor/Syndicator can earn their fee. The preferred return is typically between 8% to 10% in real estate syndications, depending on the risk of the investment. It is similar to an interest payment on your money as it accrues in the same way, but it is not guaranteed.

The Sponsor’s fees align the interests of the real estate manager with those of the investors. Oftentimes, for income producing rental properties there are fees for asset management or property management that pay for overhead expenses to operate the property. The performance fee (aka the Promote), is typically the largest part of their compensation, is what motivates the manager to deliver the highest returns to investors.

Because of this, Sponsors are incentivized to be efficient with cash and return capital to pay down the preferred return as quickly as possible so they can begin to share in the upside. A sensible Sponsor will not take on a project if they don’t believe they can significantly outperform the preferred return or they wouldn’t make any money.

About the Author

Jonathon Dilworth is the Principal of C&D Partners, a real estate development and investment company that specializes in value-add multifamily investing in the Western United State and for-sale spec single-family-home development in Culver City, CA.