You’ve Probably Been Dreading This…
Issuing quarterly distributions to investors is an important part of commercial real estate. However, depending on the structure of the deal, the number of parties involved, their ownership percentages, and the amount of revenue that the asset is bringing in (and whether you as a GP are compensating yourself for those returns), it can be difficult for you and your team to calculate CRE distributions efficiently — let alone accurately.
There are countless details that must be considered when the time comes to calculate CRE distributions to investors, just a few of which include:
- What are the terms of the investment agreement?
- What entities are involved (individuals, syndicates, funds, etc.)?
- How many investors do you need to calculate distributions for?
- What is the ownership percentage of each investor?
- Is a waterfall structure in place with a tier-based system?
- What revenues are required in order to meet specific tiers?
- Do you have the banking information for each investor?
With commercial real estate facing more challenges than ever, the last thing you and your team need to be dealing with is manual calculations — most likely built out in dense spreadsheets where the risk of human error increases exponentially. Additionally, your time is critical and should be spent on building relationships, identifying new deals, and looking to maximize value for investors — not handing out paper checks.
Here, we’ll explore a few quick tips and share resources to help you expand your knowledge and, hopefully, streamline your workload when the time comes to calculate CRE distributions to your investors.
1. Automate Waterfall Calculations
If you have a waterfall distribution structure in place, it’s likely fairly complex. There are multiple people or entities involved, all with their respective share of due returns. And of course, there are tiers — levels of returns that govern how profits are distributed according to the terms of the investment agreement. Often, firms use spreadsheets to calculate CRE distributions in a waterfall model, but again, even if you have the most glorious of spreadsheets set up with clean, sophisticated functions — it’s still a manual process. And it only takes one accidental keystroke to completely ruin it.
- Solution: Leverage technology that automates waterfall calculations. These platforms allow you to build out waterfall structures according to the unique terms of the investment agreement for each deal. A bit of upfront work, and you and your team will be all set going forward.
2. Streamline Banking Activity
While the overall banking situation is its own beast, the daily process of making deposits, transferring funds, reporting on balances, issuing payments to vendors, and other related activities is — again — manual, time consuming, and fraught with risk. One misguided click, and you’ve just sent $100,000 to the wrong investor. That’s just one of the many risks involved, to say nothing of the sheer time commitment from you and your team that could be better dedicated elsewhere.
- Solution: While you likely have multiple bank accounts per asset, each of those accounts is likely with a different institution. That’s a great way to mitigate risk, but consider using a digital solution that enables you to open, fund, manage, and report on banking activity (while earning great interest) with just a matter of clicks.
Closely related to all of the above is the need to automate payments. Every day, you likely have a number of transactions you’re executing, per asset. These could be for repairs, legal services, payments to other financial institutions, investor distributions, and more. Rather than cutting checks, inputting the details for an ACH transaction, and dealing with the countless other manual tasks present in making CRE payments, consider how much time and hassle you could save by going a different route.
- Solution: It’s time to leave wires, NACHA files, and paper checks behind. Consider using tools that integrate with third party banking partners to help you issue payments of virtually any kind to the right parties in just a few clicks. The right tools will allow you to generate and provide reports to investors, improve transparency, and allow investors to see exactly where the asset stands in performance.
Calculate CRE Distributions with Covercy
Covercy has developed the first platform for GPs and their investors that brings all of the above together — and much, much more — into a single platform. Using our CRE investment management platform, which integrates banking in addition to asset management, teams have been able to achieve significant results:
“Covercy has allowed us to streamline our investor interaction through their direct deposit distribution payments, document storage, and investor portal where investors can see their investment portfolio information regarding each asset.” — Sadie Swisher, Operations Manager, Profusion Private Asset Fund
If you’re ready to experience a new way to calculate CRE distributions and streamline the rest of your workflow, our team is ready to help. Get in touch with us today to get started.