Will You Get Your Share of Profit If the Property Is Sold?

You were careful and invested in a winner. There is an unusual opportunity to dispose of the property at a substantial profit. If a profit is made on the sale, who gets it? How much will you get? The profits on a sale are distributed in proportion to the original investment or to the ownership of the syndication units unless the agreement which you signed provides otherwise.


Suppose a property was acquired for $1,000,000, $200,000 was paid in cash, and a mortgage for $800,000 was given. If you invested $10,000, you contributed 5% of the total cash amount. Now, if the building was sold at a profit of $160,000, you would be entitled to 5% of the profit, or $8,000 plus the return of your $10,000 investment.

But if the agreement provides, that the syndicator is to get 30% of the profits on a resale, you will make a profit of only $5,600 instead of the $8,000 which was earned on your share. The purchase of the building was financed with your money and that of your co-investors. Yet, even though a profit of 80% is realized, you get only a 56% profit on your investment, because that is what it said in the agreement which you signed when you bought the syndicate unit. Every brochure is arranged differently. Therefore, we cannot tell you whether you will find the clause which we are discussing under Proceeds of Sale or some other heading. But it is almost certain that your brochure or prospectus will contain a clause regulating the distribution of the profits on a sale. Such a clause may look as follows:

All proceeds from the sale of the property in excess of the original capital contributions of all partners will be distributed 70% to the limited partners pro rata in accordance with their original contributions of cash or property of agreed value, and 30% to the general partners. We do not mean to imply that the 70% - 30% split is the rule or is reasonable. The investors may get more or less than 70%. It all depends on the agreement. We have seen brochures where the profit on a resale was first to be split one half with the tenant under the terms of the long term lease. Of the remaining half, the syndicator was to receive one third. In the end the investors wound up with the right to only one third of the profit which might be realized on the sale of the syndicate property. In order to find out what share of the profits on a resale you will get you must therefore examine also the provisions of the net lease. When you deduct what the tenant under the net lease may get and what the syndicator is entitled to, then only will you know what is left for you and your co-investors.
At the time the sale is made, it will be too late to worry what share of the profits you will get. That was determined at the time you signed the agreement. The information is in the brochure. Be sure to look for it, if you want to know whether your investment offers hope of growth.


Next: Purchase and Repurchase Options — Good or Bad?