I found my own deal and I am trying to work out a fair waterfall structure for investors. So I have a few questions:
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I am open to any suggestions on what a fair structure may be for a value-add MF product with a 7 year hold
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More importantly: Are waterfalls based on IRR. Our investors are cash on cash focused- has anyone seen a cash on cash waterfall hurdle and if so how does that work?
I’ve seen waterfalls based on equity multiple hurdles, but not cash on cash hurdles.
If it’s value-add, I doubt you personally want cxc to be a hurdle. Make it irr, it’s simple, and the best way to explain it to investors that are non real estate people. If they are that cxc focussed you should buy core-plus. Va assumes some low cash distribution years.
I've seem a cash on cash cash on cash hurdle in a build to core transaction. Was fund modeling that out.
If you think you have a deal that cash flows pretty well, you may want to break out the waterfall into distributions from operating cash flow and distributions from capital events. For example:
Operating Cash Flow Distributions
1) Current 8% pref
2) Accumulated 8% pref
3) 20% promote above the pref
Capital Event Distributions
1) Current 8% pref
2) Accumulated 8% pref
3) Return of capital
4) 20% promote thereafter
This.
Additionally, I’ve seen it where the waterfall is only on capital events
Seconding this, your c/c hurdle is going to be modeled the same as a preferred return. Using an IRR hurdle is effectively a catch-up clause which doesn't seem to make sense in this scenario.
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