August 24, 2023
By: Ryan Wynkoop, Investor Relations Manager
A big focal point for real estate investors looking at deals to invest in is whether that deal has a preferred return. We often get this question from savvy investors, but it is often overlooked and not fully understood. So what are preferred returns in a real estate deal, and why are they important? Let’s take a moment to dive deep into this subject.
A preferred return, often called a “pref,” in a real estate deal is the priority or preference of a return to the investor before profits are shared and split with the sponsor. This means that, based on what that preferred return is set at, the investor will see that part of the profits before any profits flow down to the rest of the equity capital stack. Typically, preferred returns are in the 8%–10% range, based on the type of investment opportunity and the risk associated with that investment.
Not all sponsors provide preferred returns, but they are important for many reasons. The preferred return gives an investor the confidence that they are likely to see a certain size return in a deal as an expected baseline. Also, and potentially even more important, the preferred return incentivizes the sponsor to ensure they perform in the deal beyond the preferred return rate to ensure they see a profit in the deal. If a sponsor is offering a preferred return to investors, it is likely they are confident the deal will perform either at or even beyond that measure in some cases. Preferred returns are most often offered to Limited Partner investors in a real estate syndication. These investors are forming the pool of capital needed to make acquisitions of properties or fund the operations and budgets needed to execute the investment strategy. The sponsor is usually also the General Partner in the deal—they are generating a return in the deal after the limited partners see their preferred return rate met—which is often done in a waterfall split of profit sharing between the General Partner and Limited Partners.
Ashcroft Capital offers preferred returns to our investors for both class A and B of shares in our offerings. For our current offering, the Ashcroft Value-Add Fund III (AVAF3), Class A shares generate a 9% preferred return, while Class B shares generate a 7% preferred return. This is incredibly attractive to our investors, who know Ashcroft is confident in the performance of our acquisitions and at performing at or above our target preferred return rates. We believe it is important to demonstrate to our investors this commitment to execute our value-add strategy and overall property performance, and this is one of the major reasons they look to invest with Ashcroft Capital.
If you are interested in reviewing our current offering, please visit https://info.ashcroftcapital.com/fund, or schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com. We look forward to the opportunity to work with you and align our investment interests.
