RE Waterfall Case Study

Hi guys,

Hope you are fine. I'm actually a student in a good school (but no Ivy League) and I'm doing my end-of-study internship in a little shop where they finance a lot of real estate projects. After a long time of networking, I have passed the first round of a good PERE shop (i.e between 30 and 40 in the PERE50 ranking), and i need to realize an investment case for the second round.

I litteraly don't have any idea on how to modelize the waterfall despite using Real Estate models that i downloaded on the internet. Could you help me please?

The consigns are below:

**An equity fund has been raised to invest in residential multifamily properties. The capital contributing partners (“Limited Partners”) will contribute all capital to the fund, and will receive a return of their investment along with a preferred return before the manager of the fund (“Manager”) receives any incentive compensation (“Carried Interest”). The calculated fund‐level cash flows are included in Exhibit A, and are shown net of leverage.

Based upon the accompanying net cash flows, build a model that displays what the Manager’s carried interest would be under the following distribution structure:

• First, 0.0% to the Manager and 100.0% to the Limited Partners until Limited Partners have received a 9.0% internal rate of return on their invested capital, net of distributions received as of such period;

• Second, 15.0% to the Manager and 85.0% to the Limited Partners until the Limited Partners have received a 14.0% internal rate of return on their invested capital, net of distributions received as of such period;

• Third, 50.0% to the Manager and 50.0% to the Limited Partners until the Manager has received an amount equal to 15% of the fund level net profit through such period (as determined on a cash flow basis);

• Fourth, 15.0% to the Manager and 85.0% to the Limited Partners until the Limited Partners have received a 1.80X equity multiple on total Limited Partner invested capital to date;

• Fifth, 100.0% to the Manager and 0.0% to the Limited Partners until the Manager has received an amount equal to 20.0% of the fund level net profit through such period (as determined on a cash flow basis), and thereafter;

• 20.0% to the general partner and 80.0% to the capital contributing partners.**

The Exhibit A is : Year 1: Contributions: -127 702 974 ; Distributions: 2 035 024 Year 2: Contributions: -190 652 894 ; Distributions: 9 623 472 Year 3: Contributions: -178 389 545 ; Distributions: 21 465 356 Year 4: Contributions: -157 523 ; Distributions: 31 486 823 Year 5: Contributions: 0 ; Distributions: 38 724 408 Year 6: Contributions: 0 ; Distributions: 257 133 213 Year 7: Contributions: 0 ; Distributions: 358 535 081 Year 8: Contributions: 0 ; Distributions: 323 083 224

The net yearly cash flow is the difference between contributions and distributions.

Thanks a lot for your help, a Real Estate Student