Although there are a number of ways to structure syndication for multifamily apartment properties, Stelvio Equity Group LLC generally uses a 2-class structure for its investor LLCs. Class A interests or shares are purchased by equity investors. Class B interests or shares are reserved for members and/or managers who provide services to the company.
The resulting investor entity (Investor LLC) will be managed by Stelvio Equity Group LLC. The Investor LLC will have an agreement between Stelvio Equity Group LLC and the investors that will govern how the Investor LLC will operate. This company agreement defines management and investor rights and duties, and how cash will be distributed to each of the participants.
Stelvio Equity Group LLC, the manager, is a multi-member LLC. It’s members are Mark A. Devereaux, Kelley Devereaux, and Josh Galardi. This is important to note because in the event something should happen to an individual within the management team, there are others who are in place to continue the business of the entity.
Investors who purchase Class A interests in the Investor LLC will become Class A members of the Investor LLC. Class A members generally contribute 100% of the capital contributions necessary to capitalize the Investor LLC in exchange for a portion of the ownership interests. Stelvio Equity Group LLC will retain the remaining interests as compensation for its past contributions to the Investor LLC in the form of Class B interests.
Class A members are also referred to as Limited Partners. Limited Partners assume a passive role in the day-to-day operations of the investment and are not generally required to personally guarantee any debt obligations.
Class B members are also referred to as General Partners. General Partners assume the active day-to-day management and operation of the investment. It is typical that a Stelvio Equity Group LLC syndication will seek non-recourse financing on its syndications. In the event recourse financing is used, only those members considered to be General Partners will be required to guarantee the debt.
Class A members may be offered a preferred return. In the event a preferred return is offered, the preferred return can be cumulative or non-cumulative. A cumulative preferred return continues to accrue even if there is not enough available cash to pay it when it is due and it becomes payable at some future capital event. A non-cumulative preferred return does not accrue, but this arrangement is not common. Preferred returns are typically calculated on an annualized basis and are typically paid quarterly.
Class A members also may not be offered a preferred return with ownership interest simply being split on a percentage basis between class A and class B members. For example, in an 80/20 split, class A members would receive 80% of the interests of the Investor LLC while class B members would retain a 20% interest. Distributable cash flow would then be split according to ownership interests.
Class B members are the service class. This class is made up of Stelvio Equity Group LLC members. Class B members retain an ownership interest in the company that is not sold to Class A members for a nominal amount plus their noncapital contributions to the Investor LLC entity.
The class B members, or Stelvio Equity Group LLC, only receive their portion of distributable cash flow AFTER class A members have received their returns. On capital transactions, such as refinance or a sale, class B only receives distributions AFTER class A member’s capital contributions are returned and any arrearages to class A members have been paid. Thus, class B is completely subordinate to class A.
We use this 2-class structure for a number of reasons:
- To preserve distributions for the management class (class B) if the management class is removed or replaced.
- To segregate fees from distributions so that earnings on class B distributions may be taxable at capital gains rates, versus manager fees, which would be taxed at ordinary income rates.
- Allow for class B members, or the management class, to allocate interests amongst those who may provide services.
Lastly, all of this is laid out in the issuer documents investors receive once a syndication is formed.
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