FREQUENTLY ASKED QUESTIONS
How are McKenna Capital deals typically structured?
You will be a limited liability owner of the property which comes with all the benefits like depreciation and cash flow, meaning the property is owned by a "Property LLC" for which that property is the only asset (reduces liability). You in turn will be a direct shareholder in this Property LLC so in essence you are part owner of the company that owns the property. This allows for a direct flow-through of cash flow, depreciation, and allows you upon sale of the asset to realize long term capital gains.
Can I invest with my LLC or Self-Directed IRA?
From our side the short answer is yes. It would simply entail a slight difference in how you sign the subscription agreement and fund the deal, with no added degree of difficulty. In fact, I have a contact at Midland IRA that can help you set up a Self-Directed IRA and be your single point of contact along the way and your Self-Directed IRA liaison for any investment with us. I’m happy to share that contact with you if you send me an email request.
How safe are these investments?
Let’s get the brutal truth out of the way first. Because there are outside factors not in our control (namely, market conditions), there is a risk that you can lose your entire investment, just like you could in the stock market, single family homes (SFHs), a small business/start-up, etc. On a more positive note, we view this as a very highly unlikely possibility for several reasons.
How long do I need to make a commitment for?
The exit strategy for these investments is generally five years, although it may vary depending on the property and specific business plan being executed. Changing economic circumstances can also affect the original hold time, so passive investors do need to place a certain level of trust in the management team to make decisions that will maximize all investor’s returns. Original timelines will be adhered to as much as is possible to protect everybody’s investment.
What if we have a downturn in the economy?
We won’t want to sell in a down market. The goal would be to continue to pay the preferred return minimum and hold on until the market is healthier to achieve a better price at sale. Class B/C value add properties tend to hold up much better in downturns because folks need a place to stay and rents are more in line with the market / service economy demographic that is typically still employed in downturns versus the class A renter making $100K/yr. whose jobs are more at risk.
What is a preferred return?
Typically, 8% is what I see most. This favors the limited partner. It essentially means that the first 8% return on an investment (distributions from cash flow or capital events such as refi proceeds or sale) will go entirely to the limited partner, nothing to the general partners. This is not a guarantee but the next best thing.
What is a split and what is a waterfall?
The split is investment returns that go to the investors in the portion of the split. So, if the split is 70% to the limited partner and 30% to the general partner, after the preferred return is paid (if there is one), then the partners split all other proceeds from distributions or capital events 70/30. That split can change if a certain hurdle (or waterfall) is achieved. Example: A split could be 70/30 then go to 50/50 once the IRR hits say 18%. Any returns higher than 18%, will then be split 50/50 LP/GP. That is a waterfall.
What happens to the money when I fund an investment?
Funds can be wired directly into the subscription account of the fund, or sent by check. The funds are trypically held in an escrow account in the name of the LLC until the closing of the property. McKenna Capital never takes possesion of your funds.
What is a K-1?
Similar to a 1099, a K-1 form is an accounting of the tax income for the year. Each investor receives one per investment. K-1 forms are most commonly used in partnerships and in real estate ownership.
Am I able to cash out of my investment at any time?
No. By their nature, real estate investments have a longer term time horizon than that of liquid stocks or bonds.
What is the Sponsors track record?
The answer to this question will vary by Sponsor; each has their own history and business structure, and thus a different track record. To speak to our Sponsors specifically, we only partner with what we firmly believe to be the most top notch Sponsors in their niche who hold high values, place focus first and foremost on Limited Partners (LPs) (i.e. capital preservation and downside protection), and have a strong history of performance.
Does the Sponsor invest in their own deals / why are they investing such a small amount?
How is the deal structured in terms of profit sharing with the LP & GP?
What are the fees and how does a Sponsor make their money?
First and foremost, all fees are separate from return projections. What that means is that fees will have no impact on the return projects you will see in any of our deal decks; the LPs are not paying any fees “out of pocket.” That being said, Sponsors most often make their money in three ways. (1) The acquisition fee (1-3% of purchase price) which is paid at close and covers all costs associated with finding and putting the property under contract. (2) The asset management fee (1-3% of monthly revenues) which covers costs associated with executing the business plan; overseeing the property management company and construction management company, identifying and implementing value-add strategies, improving operational efficiencies, etc. (3) The equity split of profits after the pref; most common here is 70/30 (70% to the LPs and 30% to the GP), but you may also see 60/40, 80/20, etc.
What are the projected returns?
What is the minimum investment?
$50,000 with increments of $5,000.
How frequently are distributions made?
We do quarterly and monthly distributions. Quarterly is the most common, with monthly being a bit more aggressive/work intensive on behalf of the Sponsors, but investors love this for obvious reasons. I’ve also heard of, but never seen, annual distributions.
How often will communications / updates be sent out?
Will I be able to 1031 exchange from one deal in to the next?
You cannot 1031 in to our deals since you are purchasing units of our Limited Partnership and not actually the property itself. However, although not guaranteed, there is potential to 1031 from one of our deals in to the next, given the right timing, thus providing the extremely powerful benefit of tax deferred growth.