Capital Stack

It would be helpful if you could be more specific about what components you are interested in. Assuming you understand debt and equity as the only two sources of capital (your own cash versus borrowed money), here are some other private equity basics applicable to real estate deals for you to research further:

1. Joint venture - a partnership to complete a real estate project, typically between an operator (known as "General Partner") and a capital partner (known as the "Limited Partner"), remember this by you are both jointly taking on a venture

2. Joint venture agreement - this is a negotiated partner agreement between the partners that includes all of the following and more:

   • Proportions of equity contributions between partners (how much cash each partner will contribute and the corresponding percentage) and when they will contribute (ex. GP will contribute 10% of regular equity, LP will contribute 90% of regular equity)
   • Proportions of additional equity (if needed) required between partners if more cash is needed and what the penalty is if a partner can't contribute (ex. 20% penalty on additional capital contributions not matched by partner)
   • Preferred equity contributions, how they are treated, who will contribute and terms including the pricing (what % on that money), what preferred return it will receive and when it will be paid in the capital stack on exit (typically first, after debt but before regular equity contributions)
   • At exit of investment: waterfall (will define below) and corresponding promotes (will define below) for each partner

3. General Partner - the "managing" partner within a joint venture, this is the operator - the party with the know how including but not limited to acquiring the land, securing the debt, managing the entitlement or approval process, coordinating the design and construction process (if it is a renovation or development deal), lease up and stabilization phase, etc. Essentially they will be the partner running this deal and making all of the major decisions (assuming they follow the joint venture agreement and are not in violation of any of the provisions that allow the Limited Partner to remove them as manager).

4. Limited Partner - the "limited" partner as they cannot make any major decisions within the deal (assuming GP does not violate any covenants), this is typically the capital partner whose job it is to look over the General Partner's shoulder to make sure they are acting on the business plan. Although it may sound like the GP has most of the power, the dynamic typically is that they have to answer and cater to the LP's whims and ways of doing business since the LP puts in nearly all of the capital required (usually 85%+ of the total equity).

5. Preferred equity - jargon can make this seem complex but ultimately JV agreements and equity contributions (what is being contributed in the form of cash for ownership) are basically agreeing who will put up how much cash, how it will be treated and what ownership (equity) each partner gets for that cash. Preferred equity is cash that is either paid out first when you exit an investment (through refinance, sale of property, "marking" the asset to market or partner interest buyout) and/or that accrues interest that is different to the other "classes" of equity within a deal. (ex. LP will contribute 60% of the total equity required in the form of Preferred Equity which in an exit situation will be paid after all forms of debt but before regular equity).

6. Waterfall - in an exit (see scenarios above), this is simply the order in which cash (proceeds) will be returned to partners. Depending on how great the return is on this investment, certain "levels" of the waterfall will be reached and no money will be paid out. Many deals have IRR "hurdles" with corresponding promotes (defined below). An example would be if on a project level this deal returns a 35%+ IRR then the General Partner receives 25% of all returns in excess of this threshold (Limited Partner receives 75%). Debt always gets paid first, preferred equity is usually next (if applicable) and regular equity is split depending upon how it is specified depending on agreed upon return thresholds.

7. Promoted interest ("Promote") - in an exit of the investment, this is the amount "extra" you will be paid over the proportion you contributed. For example, if the GP contributes 10% of the regular equity and the agreed to waterfall agrees to pay the GP 20% of the proceeds (cash) coming back then the GP has a 10% "promote". This is usually structured in a tiered system with return thresholds.

That should do it in terms of the basics, please share any other terms or concepts that are still vague or need further explanation.