Waterfall Modeling
Wanted to know if any one has worked on a model that addresses the problem that arises when you have a high cash flowing asset and low hurdle rates. For example: if the asset is generating a 11% average cash on cash through the holding period and you have a 9% preferred return to all equity, you will end up distributing excess cash-flows to a) pay down equity capital balance or b) just distribute excess cash. Upon exit you will pay preferred return owed and return equity capital and notice that you probably paid 13% or 14% IRR as you move into your first hurdle of let's say 12%. In this case the way my model is structured is that it will generate a negative number for distribution so that total cash-flows distributed = 12% IRR. This becomes a problem when trying to calculate the sponsor promote for reaching that hurdle. I know how to calculate the sponsor share in this case using goal seek but I want to be able to calculate this in a dynamic model so that you can change inputs and not have to solve manually. Thanks!