Journal Entry - Deferred Preferred Return (Real Estate LLC)

Sorry, kind of a dumb question, but I never deal with this: We are accruing the deferred preferred return for the preferred member of a real estate LLC. Presumably the preferred return would increase their capital account.

But what do I debit? Is it an expense (like interest or guaranteed payment)? If so, it's an expense that would need to be capitalized (during construction).

I assume that's the proper treatment, but it would need to be treated like a guaranteed payment by the member, right? Like a guaranteed paymnent... or would I send a 1099??

In the back of my mind I want to treat it like a dividend, but it should increase, not decrease their capital account. Gotta be an expense....I think?...

I have another dumb question - what the heck is a deferred preferred return?

I have another dumb question - what the heck is a deferred preferred return?

I don't think it's a dumb question, or at least we're dumb together.

My gut is that it means something similar to an arrearage in cumulative preferred stock dividends, but that wouldn't be journalized at all.

Well I know you can defer paying dividends on preferred stock. I was thinking it would be similar to that as well. If that's the case, you would debit the equity account (dividends, draws, etc.), and credit the payable account.

It can be a disguised guaranteed payment or a tier of earnings allocations. I find every time this comes up, I need to go over what will happen with the members.

Guaranteed payments can be for the use of capital or the performance of services.

Johnny puts in $100,000, Mark puts in nothing. OA calls for a preferred return to Johnny of 10% annually. I would construe this a guaranteed payment.

If all the members put in capital, and the rate of payment is different for each partner, then I look at this as a tier of allocated profits.

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