Is this waterfall model correct?
I'm new to real estate modeling and I need to a create a waterfall model for this specific structure:
Distribution Priority:
1) 8% preferred return to LP
2) 8% preferred return to GP
3) Pari passu return of capital to LP and GP
4) 70% of remaining cashflow to LP and 30% to GP
I've spent many hours googling sample models on the internet and watching youtube videos but I haven't found a model for the exact structure above yet, so below is my attempt to create one. If any experts on here have the time to review my model for accuracy, I would really appreciate it!
Since I'm new here I have to split up the link below so please reconstruct:
https://docs.google. com/spreadsheets/d/1v7nRK9G7hS9ZWLiefF6K2VS5iDD0vthddYrwjLBwGP8/edit?usp=sharing
So it isn't necessarily wrong, but this is some type of catch up return.
So typically the 175k would be split prorata to pay down both the LP/GP balance based on ownership. Idk seems like you did this on purpose
Also the way you have your cash flows just makes it hard to audit, Usually people throw in XIRR formulas at each level to show the LP received 8% IRR on their dollars then goes to the next hurdle, if that XIRR isn't = to that hurdles % you did something wrong. I see the 8% you have for the GP but it's not consistent
Also LP returns should be below deal level and GP above
Yes, for this deal, LP gets preferred return before GP gets preferred return, but return of capital is pari passu. Have you not seen this before? I think the idea was that the investor gets the first dollars before the GP. To make it more attractive to the LP.
Row 56 has the LP preferred return error check. Is this what you were looking for or something else is needed?
You mean the location of the cells? In other words, move rows 27 through 30 above row 20? Thanks for your help!
1. See this is a terminology thing - The GP gets nothing until the pref is received but does get money in that area of like 8%-8.8% deal level return. This is a catch up. Pari Passu would be them getting their pro rata share first then promote after in each tier
2.Row 56 is what I was looking for usually its there for each section
3. No, like a final check on GP IRR and LP IRR - If the deal is a 17% the LP should be like 15% and GP should be above 17% for example. It's a good gut check.
People usually look at
IRR
Multiple
Total Profits
Then the LP and GP total profits should add up to deal level, that way you can tell no additional dollars are in the waterfall that aren't in the cash flows
I think that's there in cells D17, D24, F29?
And the cashflow check is in cell I4?
As I interpret this, you'd just have 2 hurdles: Hurdle 1) return of capital + 8% pref pari passu (gp + lp get paid at the same time); Hurdle 2) the 70/30 split on remaining cash flows.
Still, if the LP does get preferred return before any GP distributions, having LP return of capital as lower in priority to the GP hitting the preferred return doesn't make much sense imo
Why doesn't it make sense?
Because preferred return is a distribution of profit. You would return lp invested capital before you would distribute out any profits. Otherwise if the deal loses money, the gp would receive cash flows that should be going to the lp until they return their initial investment.
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