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Did a lot of 3-tier, as well as 5-tier waterfall modeling early in my career. Are they pari passu distributions ? Typically there's a hurdle 1, and there's a hurdle 2 (after hurdle 1 is satisfied), lastly the Developer's share of cash flows shoot up after hurdle 2 is met.
Are you still in the PE/Water Fall Modeling game? If so what are you seeing for hurdle 1 Prefs and hurdle 2 Prefs (generally speaking)? 8% then 12% followed by a 40/60 residual split or something? I know this varies but lets say 2%/98% distributions to sponsor/investor respectively, Value-Add opportunity in major CBD.
Reading your thoughts would be helpful
Hey cre123 I replied with the structure below.
I ended up modeling it out as I described below. However, since its a rare structure, I imagine that this will be a 'bespoke' JV Waterfall.
In 2008, CBRE Global Investors (then called CB Richard Ellis Investors) had a PE fund called "Strategic Partners Opportunity Fund 5". Their projected returns and their "fee scoreboard" were as follows:
Equity Goal: $1 Bil Net Return Goal: 20% Fees: 1.5 Management (flat) Pref for LPs: 10% GP/LP Split Until GP Captures 20% of profits: 20/80 to 13% and then 40/60 to 20% (where the GP makes the bulk of their money) IRR at which GP captures 20% of profits: 23%
Given the the fact that today's rates are considerably lower than they were in the better years of '08, I'd assume we can pretty much cut these returns by 30% each (at least).
Thoughts?
I just want to say that I think I might learn something every time cre123 posts in a thread. Keep it up man.
An example of the big dogs having more leverage on the little guys (relatively speaking of course):
GP: Morgan Stanley Fund: Real Estate Fund 7 Global Equity Goal: $10 Bil Net Return Goal: 17% Fees: 1-2% management an 0.25-1% acquisition Preferred Return for LP's: 9% GP/LP Split until GP captures 20% of profits: 60/40 IRR at which GP captures 20% of Profits: 13.5%
Typically its a two tier structure, developer (sponsor) and equity investor. You start with a basic pref, could be 8%-10%. Then your hurdles come into play. Now when you say you have 3 partners, do you mean their will be 3 different structures, because that sounds like an absolute nightmare to figure out.
Yes, there are 3 partners. Which is making it a nightmare to figure out. Especially since it's my first waterfall. sigh
To lay it out
It's a 3 Partner, 2-tier waterfall (which I believe is a highly unusual structure).
Partner 1 (GP) - Equity Contribute is 5% Partner 2 (GP/LP) - Equity Contribute is 30% Partner 3 (LP) - Equity Contribute is 65%
Tier 1 Pref Hurdle Rate is 8%. Capital is returned first and then 8% is returned parri passu. (Also unusual from my understanding)
Partner 1 (GP) - Equity Contribute is 5% Partner 2 (GP/LP) - Equity Contribute is 30% Partner 3 (LP) - Equity Contribute is 65%
Tier 2 - Partner 1 Promote is 20%, Partner 2 Promote is %5. Partner 1 (GP) - 5 + 20 Partner 2 (GP/LP) - 30 + 5 Partner 3 (LP) - 40
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