I found my own deal and I am trying to work out a fair waterfall structure for investors. So I have a few questions:
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I am open to any suggestions on what a fair structure may be for a value-add MF product with a 7 year hold
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More importantly: Are waterfalls based on IRR. Our investors are cash on cash focused- has anyone seen a cash on cash waterfall hurdle and if so how does that work?
Comments (6)
I've seen waterfalls based on equity multiple hurdles, but not cash on cash hurdles.
If it's value-add, I doubt you personally want cxc to be a hurdle. Make it irr, it's simple, and the best way to explain it to investors that are non real estate people. If they are that cxc focussed you should buy core-plus. Va assumes some low cash distribution years.
I've seem a cash on cash cash on cash hurdle in a build to core transaction. Was fund modeling that out.
If you think you have a deal that cash flows pretty well, you may want to break out the waterfall into distributions from operating cash flow and distributions from capital events. For example:
Operating Cash Flow Distributions
1) Current 8% pref
2) Accumulated 8% pref
3) 20% promote above the pref
Capital Event Distributions
1) Current 8% pref
2) Accumulated 8% pref
3) Return of capital
4) 20% promote thereafter
This.
Additionally, I've seen it where the waterfall is only on capital events
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