Dear Investors,
In the multifamily real estate space, there have been significant developments over the past two years that may have caught the attention of prospective limited partners like you. One of the crucial topics we’d like to shed light on is the concept of “paused distributions.”
What are Paused Distributions?
Paused distributions refer to a temporary halt in the distribution of profits to investors in a multifamily real estate syndication. This pause is often initiated by the sponsor (the company or individual managing the investment) due to various reasons impacting the property’s performance or the broader economic conditions. These reasons could include unexpected maintenance costs, market fluctuations, or even a global economic downturn.
Why Do Paused Distributions Happen?
As newer investors, it’s essential to grasp that paused distributions are part of the risk and reward dynamic in real estate investments. In most cases they occur to protect investors’ long-term interests and the stability of the property. By pausing distributions, the sponsor can focus on strengthening the property’s financial position and ensuring its resilience for the future. In terms of current economic outlook, strengthening the cash reserves gives the projects more time to weather higher interest rate and higher loan payments for a few years until better conditions exist to restart distributions, cash-out refinance or sell the property. In some projects, the cashflow returns are still accumulating as expected despite paused distributions. If and when favorable economic conditions return, the investor is caught up with lump sum distributions.
How Do Paused Distributions Affect Investors?
Still, paused distributions can be frustrating for investors, especially those who rely on consistent income streams. The concept of financial freedom is rooted in the expectation that the sum of all your passive income streams are equal to or greater than your total living expenses. And for us physician investors, while we may not take significant hit to our daily routine due to our well paying jobs, the paused distributions can greatly impact our broader financial freedom strategy. It leads me to realize that while still an excellent asset class during economic downturns, even multifamily residential investments aren’t 100% immune to recessionary pressures. And we must look to ways we can mitigate this risk going forward.
What to Consider as a
Prospective Limited Partner?
For me, this time is an opportunity to look back and learn from the experience. What became apparent is that I must look more closely at and question the debt structure and the capital stack in offering documents. Many deals during this 2 year period were done with construction bridge loans, meaning variable rate debt. At the time of mid-pandemic low interest rates, these loans and deals look great. But considering the macro picture, the risk of inflation and any subsequent interest rate hikes should have been considered. It is worthwhile to become familiar with lending terms and concepts.
Another opportunity I am taking advantage of now is to observe which operators are successfully navigating this current landscape. Who has mitigated their risk with sound investing strategies and have still been able to continue making cash flow distributions to their investors. Thoroughly review the sponsor’s track record and their approach to risk management. Evaluating their past performance during challenging periods can provide valuable insights into how they handle paused distributions and navigate through economic uncertainties. Aligning with the best-in-class operators is paramount to success as physician investors.
At Time Health Capital, we draw from these investing experiences to educate and support our physician investors in their journey to financial freedom. We find the best-in-class operators to partner with to minimize risk and maximize profits. If you’d like to discuss more, I am available to schedule a 1 on 1 call.
Happy investing!
