Investment Options

How Investors are Paid: MLG’s Private Fund Return Structure

author-image
author

Charles Jacques

Senior Investor Relations Associate

The series of MLG Private Funds provides investors with access to investment opportunities that aim to produce tax-advantaged cash flow and appreciation over time. The Funds focus on growing investors’ wealth, capital preservation and diversification within private real estate investment.  

Understanding how and when returns are sent to investors is perhaps one of the most important elements of any investment structure. Within the private markets, there are a myriad of different structures that may exist. These structures can be frequently misunderstood.  

Our Funds utilize a “European equity waterfall return structure”. This is specifically designed to be an investor friendly return structure. This demonstrates our firm’s commitment to investors and our confidence in our ability to execute.  

MLG Private Funds Return Structure:  

Our latest Fund, Private Fund VI, intends to underwrite potential investments to a target internal rate of return of between 11% and 15% (net of Fund expenses and fees), on a leveraged basis. Each of our funds utilizes a three-tiered return structure. 100% of available distributions are paid to investors as follows1 

  • (Tier 1) 8% cumulative preferred return on invested equity 
  • (Tier 2) 100% return of original principal invested, after a full 8% cumulative preferred return is paid  
  • (Tier 3) 70/30 profit sharing split (Investors/MLG) of remaining cash flow distributions after full 8% and 100% return of original principal  

Subject to available cash flow, each fund makes distributions to investors, quarterly, and preferred returns begin to accrue immediately after an investor’s equity is admitted to the fund. From there, capital then participates in the tiers noted above over time.  

Tier 1 – 8% Cumulative Preferred Return 

The 8% cumulative preferred return is the annual return that our investors earn on their invested equity. In the early years of the Fund, it is not likely that a Fund will distribute a full 8%.  

For example, let’s say in year 1 the Fund distributes 5%. Within the structure, an investor will accrue the 3% that was not distributed to them (5%+3% = 8%), it will sit as a liability on the books of the Fund, and the Fund will owe that to the investor. Any accrued, unpaid preferred return compounds annually at 8% interest.  

Once all investors are caught up on unpaid preferred returns, we then move to tier 2 of the return structure.  

Tier 2 – 100% Return of Capital 

Once all preferred return balances have been paid to investors, Tier 2 begins.  

Typically, this tier is driven by liquidity events such as the refinance or sale of an asset which produces distributable net proceeds. Due to sales and refinances being periodic it’s common in this tier to receive chunky return of capital distributions during this tier.  

While we’re returning investors’ capital we will continue to accrue an 8% preferred return on the balance of their invested equity. For example, if an investor has received 50% of their original capital back, plus the full 8% cumulative preferred return on those monies, the 50% of unreturned capital that remains in the fund will continue to accrue an 8% preferred return until that remaining capital is returned to the investor.  

Tier 3 – 70/30 Profit Sharing Split 

After all investors are current on their 8% preferred return and have a 100% return of their capital, we will enter Tier 3 of the return structure. In Tier 3, all remaining cash distributions (profits) are split between the Investors and MLG with 70% going to investors and 30% going to MLG.  

This will continue until the final asset has been sold within the fund and the final distribution is made to investors.  

Dollars in your pocket:  

Now, what does this look like in terms of actual dollars in an investor’s pocket? 

In the example below, you can see how a hypothetical $1,000,000 investor from MLG Private Fund I was paid over the course of the investment. A few things to note:  

  1. Our Fund unit sizes are $1,000,000, or 1 unit. We allow fractional units (i.e. subscriptions of less than $1,000,000) 
  1. As of 12/31/2023 Fund I produced a 19.9% IRR, net, to investors. 
  1. Fund I was a 2012 vintage fund which sold its last asset on May 12th, 2023. 

Past performance is not an indication of future results. 

The “Annual Cash Flow” column represents the total amount that the investor received each year. The “Total Distributions” column then represents the cumulative distributions to the investor throughout Fund I’s lifecycle.  

As you can see, investors in Fund I received some large returns particularly in the middle years of the fund while we were selling the majority of the Fund’s assets. These return of capital distributions are part of our liquidation strategy. This can afford the opportunity for our investors to put their equity back to work in another investment opportunity.   

At MLG, we always strive to have an investment opportunity open for investment. This can help investors create tax efficiency and potential savings, more on The Tax-Efficient Power of Re-Investment here.  

Investing in private commercial real estate can be a powerful tool to grow your wealth, though it may take years of investing to achieve the long term returns one desires. If you’re interested in learning more about our Private Funds, please reach out to investors@mlgcapital.com. 

Get Started Here 

Don’t wait to invest in real estate, invest in real estate and then wait! 

 

Charlie Jacques supports the Investor Relations team at MLG Capital, splitting his time between working with investors and seeking advancements and efficiencies in the teams’ internal operations. Charlie has a passion for financial literacy and strives to help each investor fully understand the immense benefits of investing in private real estate. Outside of work, Charlie spends his time exploring the Colorado Rocky Mountains come rain, snow, or sun.

This article, and any associated materials, (“Blog”) is presented by MLG Marketing LLC (“MLG”) and is provided for information purposes only and is not an offer to sell an investment in a security. This Blog is not intended to be relied upon as a basis for an investment decision, and is not, and should not be assumed to be complete. Recipients of this Blog shall make their own investigations and evaluations into any investment offerings and review the appropriate disclosure documents for such investment prior to making an investment decision. The information contained in this Blog may be preliminary in nature. MLG does not make any representation or warranty as to the accuracy or completeness of any information presented herein. The recipients of this Blog agree that MLG, its affiliates and their respective partners, members, employees, officers, directors, agents and representatives shall have no liability for any inaccuracy, misstatement, omission of fact or for any opinion or conclusion expressed herein. The contents of this Blog are not to be considered as legal, business or tax advice, and each recipient should consult their own attorney, business advisor and tax advisor as to legal, business and tax advice.  

Past Performance is not indicative of future results.  


FOOTNOTES 

1 Affiliates of MLG may receive distributions prior to the return of 100% of investors original invested capital if needed to pay their income taxes on any taxable gain allocated to MLG or its affiliates. Preferred Return is subject to availability of cash flow. Distributions are paid quarterly and are net of asset management fees. Please see the Confidential Private Placement Memorandum of the applicable MLG Private Fund for full details regarding a particular Fund’s investment structure. The cumulative preferred return paid at any time may exceed the cumulative operating income from the Fund’s investments. Preferred return payments may be funded by sources other than operating income, including but not limited to; capital contributions, loans, or net refinancing or sale proceeds from the Fund’s investments. 

Investment Insights to Keep You Ahead

EXPLORE MORE INSIGHTS
  • News & Events

    MLG Capital opens Denver-area office after $51M apartments purchase

  • News & Events

    MLG Capital Expands Nationwide Presence with New Denver Office

    MLG Capital, a sponsor of private real estate funds targeting investment from investment advisors, family offices, high net worth and accredited individuals, has expanded its nationwide footprint with the addition...

  • news image
    News & Events

    MLG Capital Announces Expansion to Denver

    National private equity real estate investment firm adds fourth location with plans to further expand acquisition and fundraising reach in the Mountain West region  DENVER (May 16, 2024) – MLG Capital...