Typically, apartment syndicators will offer one compensation structure to their passive investors. A preferred return plus a profit split is most common. The major drawback of this compensation structure is that it is a one-size fits-all approach. Accredited investors’ goals fall into one of two categories: (1) invest for ongoing cash flow and (2) invest for upside. By only offering one compensation structure, only one of these two goals can be achieved. So, to offer investment opportunities that allow our investors to match their investment goals, we decided to offer a two-tiered investment structure: Class A and Class B. In this blog post, I will outline the Class A and Class B compensations structures, as well as the pros and cons of each so that you can determine which offering is ideal for you. Class A investors sit behind the debt in the capital stack. Class A investors are offered a preferred return that is higher than the preferred return offered to Class B investors. Our Class A preferred return is prorated 10% paid out monthly (i.e., 10% of their investment divided by 12, or 0.83% each month). Class A investors have virtually no upside upon disposition or capital events, nor do they receive a split of the ongoing profits. However, in order to be taxed the same as Class B investors, Class A investors are provided with some (but very little) upside. In our deals, the Class A tier is limited to 15% to 25% of the total equity investment and the minimum investment per investor is $100,000. Of course, other syndicators may offer a different preferred return or have different equity percentages and minimum investments for their Class A investors. Class B investors sit behind the Class A and in front of the General Partner in the capital stack. Class B investors are offered a preferred return that is lower than the preferred returned offered to Class A investors. Our Class B preferred return is a prorated 7% paid out monthly after Class A investors have received their prorated preferred return. If the full preferred return cannot be paid out each month (or each quarter, depending on the syndicator), it accrues over the life of the deal. Class B investors do participate in upside upon disposition or capital events. For our deals, Class B investors receive 70% of the profits up to a 13% IRR and 50% of the profits thereafter. The Class B minimum investment for our deals is $50,000 for first time investors and $25,000 for returning investors. Like Class A, other syndicators may offer different preferred returns, profits splits, or have different minimum investments for their Class B investors. Since Class A investors are in front of the Class B investors in the capital stack, they are paid first. Plus, the Class A investors are offered a higher preferred return. Therefore, the Class A tier is ideal for investors who prefer a stronger ongoing cashflow. Since Class B investors are behind the Class A investors in the capital stack, they are paid what is left over after the Class A investors have received their preferred return. If the full preferred return isn’t met, it accrues and is (likely) paid out upon disposition or a capital event. Class B investors are offered a lower preferred return, but they participate in the upside upon disposition or capital events (i.e., supplemental loans or refinance). Since they participate in the upside, the overall return over the life of the profit is higher for Class B investors. Therefore, the Class B tier is ideal for investors who want to maximize their returns over the life of the investment. “What if I want a strong ongoing cash flow AND participate in the upside?” For our deals, passive investors are allowed to invest in both Class A and Class B. For example, you can investor $75,000 as a Class A investor and $25,000 as a Class B investor. Offering two or multiple tiers in apartment syndications allow passive investors to select the investment option that meets their financial goals. For our deals, we offer a Class A and Class B tier. Class A Investors are offered a higher preferred return that is paid out first but do not participate in the upside. Class B investors are offered a lower preferred return that is paid out after Class A returns and do participate in the upside. Class A is ideal for investors who want a stronger ongoing cash flow and Class B is ideal for investors who want a stronger return over the life of the deal. Are you an accredited investor who is interested in learning more about passively investing in apartment communities?Click here for the only comprehensive resource for passive apartment investors. Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.What is Class A?
What is Class B?
Class A vs. Class B
Conclusion
FAQs
The Pros and Cons of Class A and Class B Passive Apartment Investment Tiers? ›
Class B investors are offered a lower preferred return that is paid out after Class A returns and do participate in the upside. Class A is ideal for investors who want a stronger ongoing cash flow and Class B is ideal for investors who want a stronger return over the life of the deal.
What is the difference between Class A and Class B debt? ›Each tranche has varying levels of risk for default, bankruptcy, or other credit proceedings. The A-note is senior debt and will receive payment before other tranches of notes during negative credit proceedings. The B-note is junior to A-notes but will rank above other lower-ranked tranches.
Are Class B shares worth anything? ›Class B mutual fund shares are seen to be a good investment if investors have less cash and a longer time horizon. To avoid the exit fee, an investor should typically remain in the fund for five to eight years.
What is the difference between Class A and Class B buildings? ›By definition, Class B buildings are older than Class A buildings, meaning that the investment opportunity presents a relatively higher risk for investors. While Class B buildings aren't necessarily in disrepair or on the outskirts of a city, they are generally middling in quality.
What are the pros and cons of passive real estate investing? ›- Pros: Liquidity, diversification, and regular income through dividends.
- Cons: Lower control over investment choices, subject to market volatility3.
The difference between Class A shares and Class B shares of a company's stock usually comes down to the number of voting rights assigned to the shareholder. Class A shareholders generally have more clout. Despite Class A shareholders almost always having more voting rights, this isn't actually a legal requirement.
What are Class B funds? ›Key Takeaways
A B-share is one type of class of shares offered in a mutual fund that charges a sales load. The other common share classes are A-shares and C-shares. With B-shares, an investor pays a sales charge when they redeem from the fund, known as a back-end sales load or a contingent deferred sales charge (CDSC).
3. Dividend Payments: Class B shares often have the same dividend payment as Class A shares, but they may be paid out at a different rate. This means that investors who own Class B shares can still receive a portion of the company's profits, but they may not receive as much as those who own Class A shares.
What are the benefits of Class B shares? ›One of the biggest advantages of investing in Class B shares is the lower fees associated with them. Compared to Class A shares, which typically have higher fees and front-end loads, Class B shares have lower expenses and no front-end loads.
Can Class B shares be sold? ›Investors purchasing Class B shares may instead pay a fee when selling their shares, but the fee may be waived when holding the shares five years or longer. In addition, Class B shares may convert to Class A shares if held long term.
What is the difference between Type A and Type B building? ›
All construction types except for Type 4 fall into one of two subcategories: Type A or Type B. Type A buildings are “protected” constructions and Type B structures are “unprotected” constructions. Protected constructions are more fire-resistant than unprotected constructions.
What is the difference between Grade A and B building? ›Office Building Age
A fundamental factor is Grade A spaces are typically newly constructed, renovated, or refurbished within the last five years. Grade B spaces encompass buildings older than this timeframe, potentially having had previous tenants.
A Class 1a building is a single dwelling being a detached house; or one of a group of attached dwellings being a town house, row house or the like. A Class 1b building is a boarding house, guest house or hostel that has a floor area less than 300 m2 and ordinarily has less than 12 people living in it.
What are the 5 advantages of passive investing? ›- Steady Earning. Investing in Passive Funds means you're in it for a long race. ...
- Fewer Efforts. As one of the most known benefits of passive investing, low maintenance is something that active investing surely lacks. ...
- Affordable. ...
- Lower Risk. ...
- Saving on Capital Gain Tax.
There is no need to select and monitor individual managers, or chose among investment themes. However, passive investing is subject to total market risk. Index funds track the entire market, so when the overall stock market or bond prices fall, so do index funds. Another risk is the lack of flexibility.
What are the pros and cons of investing in a passive index fund? ›- Pros of Passive Investments. •Likely to perform close to index. •Generally lower fees. ...
- Cons of Passive Investments. •Unlikely to outperform index. ...
- Pros of Active Investments. •Opportunity to outperform index. ...
- Cons of Active Investments. •Potential to underperform index.
B is some distance away from the very worst credit ratings, but it's also a few rungs down from being of investment grade. Investors may describe bonds with B ratings as junk bonds, since they tend to be riskier and less popular choices.
What is the difference between Class A and Class B dividends? ›Class B shares typically have lower dividend priority than Class A shares and fewer voting rights. However, different classes do not usually affect an average investor's share of the profits or benefits from the company's overall success.
What is a Class A loan? ›Class A Loans means collectively, the Initial Loans, the Incremental Loans made on the First Incremental Effective Date and the Incremental Loans made on the Second Incremental Effective Date.
What is a Class B asset? ›Class B properties are a step down from Class A in terms of building quality, location, and amenities. While it's possible to have a brand new Class B asset, it's more common that an asset becomes Class B due to age.