ANSWER

When a syndicate secures an interest-only loan, the interest-only payments yield additional cash flow versus simply paying down the principal. Let’s take an example. Say we have a $10,000,000 loan at 4% - the interest only annual payments would be $400,000. However, if the loan was amortizing, the annual payments would be $572,898. Interest only payments yields an additional $172,898 in cash flow distributions. It’s nice for limited partners to see this cash flow throughout the hold period. In this way, this additional distribution is greater than receiving a larger distribution at sale. In addition, if there is a market downturn so great that the property loses value, it would have been better to receive that additional cash flow prior to the sale of the property.

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