The preferred-return framework on a private mortgage fund runs against two primary frameworks — the cash-on-cash framework and the accrued framework. The choice runs against the fund’s investor framework, the fund’s manager framework, and the fund’s distribution-cycle discipline. This article walks the side-by-side framework against each.

Cash-on-cash framework

The cash-on-cash framework runs the preferred return against the actual cash distributed on the quarterly cycle. The framework runs no preferred-return arrearage against the subsequent quarter — the unpaid preferred runs as forgone return against the investor on the cash-on-cash framework. The framework runs the fund’s distribution discipline against the simpler-reporting framework on the quarter.

Accrued framework

The accrued framework runs the preferred return on a cumulative framework against the lender-investor base. The framework runs the unpaid preferred against the subsequent quarter on the preferred-return arrearage framework — the unpaid preferred runs to the next quarter and runs the arrearage framework against the fund’s investor-reporting cycle. The framework runs the lender-investor base on a higher economic-priority framework against the fund’s performance discipline.

Investor framework

The cash-on-cash framework runs the investor on a current-distribution framework against the quarterly cycle — the investor runs the preferred-return distribution against the actual cash on each quarter. The accrued framework runs the investor on a cumulative-balance framework against the quarterly cycle — the investor runs the preferred-return arrearage against the fund on the cumulative framework. The accrued framework runs the investor on a higher protection framework against the fund’s distribution-cycle volatility.

Manager framework

The cash-on-cash framework runs the manager on a simpler distribution framework — the manager runs the catch-up and promote tiers against the current-quarter cash framework. The accrued framework runs the manager on a cumulative-distribution framework — the manager runs the catch-up and promote tiers against the cumulative preferred-return distribution on the framework. The accrued framework runs the manager on a longer-horizon incentive framework against the fund’s performance discipline.

Risk framework

The cash-on-cash framework runs the fund’s distribution discipline on a current-quarter framework — the framework runs no arrearage against the fund’s capital-account framework. The accrued framework runs the fund’s distribution discipline on a cumulative-balance framework — the framework runs the arrearage against the fund’s capital-account framework. The accrued framework runs the fund on the obligation framework against the lender-investor base on the cumulative cycle.

Choosing the framework

The choice runs against the fund’s investor-base framework, the fund’s asset framework, and the fund’s manager-economic framework. A fund on a steady-cash-flow framework against a yield-focused investor base runs against the cash-on-cash framework on the simpler-reporting framework. A fund on a longer-horizon framework against a protection-focused investor base runs against the accrued framework on the cumulative framework. The fund’s SEC counsel and the fund’s administrator run the choice framework against the fund’s operating-agreement framework on the standard.

Related Topics

• Quarterly Waterfall Distributions for Mortgage Funds
• The SEC Real Estate Exception 3(c)(5)(C) Explained
• Mortgage Fund Subservicing Done Right
• Multi-Lender Notes With Up to 10 Investors
• Fractional Note Distributions: The Pro-Rata Math

This article is educational and does not constitute legal, tax, or investment advice. The waterfall framework runs under the fund’s operating agreement, the partnership-tax framework under IRC Subchapter K, and the Investment Company Act framework against the fund. Consult qualified legal, tax, and SEC counsel on the specific waterfall framework against any private mortgage fund.

Sources

• Internal Revenue Code Subchapter K — Partnership Taxation. Internal Revenue Service.
• IRS Form 1065 and Schedule K-1 — Partnership Returns. Internal Revenue Service.
• Investment Company Act §3(c)(5)(C) — Real Estate Exception. Securities and Exchange Commission.
• Securities Act Regulation D — Rule 506. Securities and Exchange Commission.
• Uniform Limited Partnership Act / Uniform Limited Liability Company Act — Partnership and LLC frameworks. Uniform Law Commission.