JV waterfalls - IRR or EM?

if you are a developer? What would you rather have and why? a hurdle based term sheet using IRR hurdles, or EM hurdles? Assume this question under a typical merchant builder, 3-5 yr hold strategy, and then also a long-term play, where the developer stays on with the project for a 10 year reversion.

curious to get everyone's opinion on this. Seemingly it would be simple and straightforward...being short term holds are best associated with IRR hurdles for the developer due to time value of the cash flows. But curious what you think is best for the developer on a long term hold?

thanks.

Comments (4)

Jun 15, 2017

For shorter term, you want IRR hurdles. For longer term holders, you want EM hurdles. This is because the EM does not take into account the time value of money, therefore the more cash coming in, the higher EM you will hit.

If I was the developer (GP) in the JV deal, I would consider market conditions and the LP's hold preferences to get a better sense of the ideal hold period.

Another layer of complexity is the GP's own fund. How are their investors paid?

Jun 15, 2017

I don't agree that there is a preference either way. As a developer you prefer whatever best maximizes your returns and gets you the money that you need to do the deal. That which maximizes the deal to your benefit depends on what your IRR and equity multiple hurdles are. I prefer EM for short-term deals because I've found that it's the easiest figure to use to market a shorter term deal.

Jun 15, 2017

We are doing 5-7 year holds with hurdles calculated on leveraged IRR's.

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Jun 15, 2017
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