Distribution Declaration Mechanics
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@@ -0,0 +1,112 @@ --- schema: foundry-doc-v1 title: "Distribution Declaration Mechanics" slug: distribution-declaration-mechanics category: distributions type: topic content_type: topic quality: complete short_description: "How distributions in direct-hold limited partnerships are determined, declared, and paid: the ICR gate, proportional allocation across units, suspension protocol, and the relationship between distributions and the T5013 capital account." status: active bcsc_class: public-disclosure-safe language_protocol: PROSE-TOPIC last_edited: 2026-06-29 editor: woodfine-editorial paired_with: distribution-declaration-mechanics.es.md --- Distributions in direct-hold limited partnerships are declared by the general partner when the asset's operating performance satisfies the interest coverage ratio (ICR) floor. No distribution is declared from an asset whose ICR is below 1.2×. When distributions are declared, they are allocated to all outstanding units of the relevant asset in equal proportion — no unit carries a preferential distribution right over another. The mechanics are identical across all direct-hold solutions: the ICR gate, the proportional calculation, the suspension protocol, and the T5013 treatment apply consistently across every asset vehicle in the programme. ## Key takeaways - A distribution is declared by the general partner only when stabilised operating income covers interest obligations by at least 1.2×; no exception to this gate exists and no distribution is advanced from any other asset or entity. - Distributions are proportional to outstanding unit counts; an investor holding five percent of a direct-hold LP's units receives five percent of any distribution declared from that LP — no priority class, no catch-up mechanism, no preferred return. - Declared distributions are income allocations of the limited partnership and appear on the T5013 information slip issued to each limited partner; they reduce the limited partner's capital account and do not constitute a return of original capital unless the LP's cumulative losses have reduced the capital account below the original invested amount. ## The ICR gate The interest coverage ratio for each asset is calculated as stabilised [[net-operating-income|net operating income]] divided by total annual interest obligations on all debt secured against the asset. A ratio at or above 1.2× indicates that operating income covers interest with a 20% buffer. A ratio below 1.2× means that operating income is insufficient to service debt with the required cushion and that declaring a distribution would reduce the cash available for [[debt-service-and-financing-structure|debt service]]. The ICR gate is not a soft guideline — it is a hard operating constraint built into the partnership agreement. The general partner cannot lawfully declare a distribution that would reduce the ICR below 1.2×. This constraint is the primary mechanism by which unit holders are protected from distributions that outpace the asset's ability to sustain them. The ICR is calculated per asset and per period. It does not aggregate across assets in the portfolio or across the holding structure. An asset with a 1.5× ICR and an asset with a 0.9× ICR are evaluated independently; the strong ICR of one asset does not supplement the weak ICR of the other. ## Proportional allocation When the general partner declares a distribution, the aggregate amount to be distributed is divided by the total outstanding unit count to produce a per-unit distribution amount. Each unit holder receives the per-unit distribution amount multiplied by their unit count. An investor holding 250 units in a 10,000-unit register receives 2.5% of the aggregate declared distribution. There is no preferred class of units, no minimum preferred return that must be satisfied before ordinary units participate, and no accumulated preferred distribution that must be paid up before a regular distribution is declared. The distribution waterfall contains a single level: all outstanding units of the same asset receive the same per-unit amount. ## Suspension protocol If the ICR falls below 1.2× — due to a vacancy, a tenant default, a maintenance cost spike, or adverse market conditions — the general partner suspends distributions and enters a cash-preservation protocol. Under the protocol: - Operating income is retained within the partnership rather than distributed - Debt service continues to be paid from operating income - Capital expenditure required to restore occupancy or address deferred maintenance is funded from retained operating cash - Distributions resume only when the ICR has been restored to 1.2× or above The suspension is not a gate that queues distributions for later payment in the manner of a preferred dividend in arrears. Distributions suspended during the ICR shortfall period are not subsequently paid to unit holders who held units during the period of suspension. The general partner's discretion in declaring distributions does not extend to promising future distributions that compensate for the suspended period. ## T5013 treatment and capital accounts The limited partnership does not pay income tax at the entity level; income and deductible expenses pass through to the partners in proportion to their unit holdings. At the end of each fiscal year, the general partner issues a T5013 partnership information return and prepares T5013 slips for each limited partner showing: - The partner's proportional share of partnership income or loss - The partner's proportional share of any capital cost allowance claimed by the partnership - Any distributions received during the year - The closing capital account balance Distributions reduce the limited partner's capital account. If distributions in aggregate exceed the limited partner's capital account (which would occur if cumulative losses have been allocated to the partner in excess of the original contributed capital), the excess is a return of capital and may have specific tax treatment depending on the partner's circumstances and the nature of the income flows. ## See also - [[limited-partnership-structure]] — the LP form through which distributions flow to limited partners - [[asset-vehicle-isolation]] — why distributions from one LP asset cannot be supplemented by assets held in another LP