Graduate Real Estate Series: Harvard University’s Master’s in Real... definition of American vs European waterfalls, Equity Waterfall Model with a Cash-on-Cash hurdle, All-in-One (Ai1) Model for Underwriting Development and Acquisitions (Updated Nov 2020), Evolving your Career as a Young Professional with Greg Astor – AiA, Hotel Development Model (Updated 11.4.2020), Texas Tech University – Undergraduate Real Estate Profile, Model either American-style or European-style waterfalls (read the, Model soft hurdles using Sponsor Profit Catch Up and/or LP Clawback provisions, Assume the Sponsor contributes some or no capital, Set custom distribution percentages for each partner; by default distribution percentages are determined by a, Use separate distribution assumptions during operation compared to at reversion; this feature is available in my, Model up to two tiers during operation and up to four tiers and three, Add in sponsor fees and calculate the sponsor cash flow and returns, Analyze a hold with up to 10 annual periods (plus time zero), The LP receives 100% of distributions during operation until all capital has been returned and it has achieved an. The legalese used in describing waterfalls makes a simple concept sound complicated. Real Estate Equity Waterfall Model with Catch Up and Clawback (Updated... . The crux of the model is in constructing Tier 2, which is the catch-up itself. In a private equity fund, the general partner manages the committed capital of the limited partners. Since some analysts have trouble with the concept, I decided to create a video demonstrating how to build one. the catch up) until the Sponsor has received a share of the excess profits (i.e. So you divide 100 by .80 and get $125, then subtract the initial $100 and you’re left with $25—which is what’s owed to the GP in Tier 2. The idea of a catch-up sounds intimidating, but it’s really a simple mathematical formula. I’ve built this module to be visually similar to my other real estate equity models. To make this model accessible to everyone, it is offered on a “Pay What You’re Able” basis with no minimum (enter $0 if you’d like) or maximum (your support helps keep the content coming – similar real estate equity waterfall models sell for $100 – $300+ per license). At first [...], How to Build: Real Estate Private Equity Waterfall with Equity-Multiple Hurdles, 16 October 2019 We’re continuing our How to Build series with this post on building a real estate private equity waterfall [...], New Release: Monthly Acquisition & Value-Add Model (v 2.01), 5 September 2019 We've just released Version 2.01 of our Monthly Acquisition & Value-Add Model. In April 2020, this model was updated to include the ability to include sponsor fees. The crux of the model … Paid contributors to the model receive a new download link via email each time the model is updated. About the Author: Born and raised in the Northwest United States, Spencer Burton has nearly 20 years of residential and commercial real estate experience. The fees are assumed to be paid by the partnership and distributed to the sponsor, after which any remaining cash flow is distributed to the partners per the waterfall assumptions. Hopefully you’ve found this article helpful. I put together a quick video tutorial in response to that question, and in doing so I realized I had never shared to A.CRE a real estate equity waterfall model with the ability to model a Sponsor profit catch up or LP clawback. Please don’t hesitate to reach out with requests for future content. https://www.adventuresincre.com/wp-content/uploads/2019/03/equity-waterfall-catch-up-clawback.jpg, https://www.adventuresincre.com/wp-content/uploads/2018/04/black-logo-with-top-2-e1523391010256.png, Real Estate Equity Waterfall Model with Catch Up and Clawback (Updated Oct 2020), © 2014 - 2020 Copyright - www.AdventuresinCRE.com, LLC, Alternatives to Graduate Real Estate Education with Richard Byrd. Toggle on and off the LP Clawback and Sponsor Catch Up modules. Since some analysts have trouble with the concept, I decided to create a video demonstrating how to build one. Download WSO's free Private Equity Distribution Waterfall model template below! This Waterfall Model template in Excel model provides a four tier waterfall profit distribution scheme as used in Private Equity or Real Estate investment partnerships. We will look at the following example where we … Spencer holds a BS in International Affairs from Florida State University and a Masters in Real Estate Finance from Cornell University. When distributing the capital back to the investor, hopefully with an added value, the general partner will allocate this amount based on a waterfall … A question came up recently in the A.CRE Accelerator’s real estate waterfall modeling course regarding how to model GP Catch Up (i.e. Total LP Distributions – Capital Contributed) equal to its first promote level (cell F15). We know that the LP receives 100% of the Tier 1 cash flows. Thus as long as the cash flow meets or exceeds the Tier 2 hurdle, you can easily verify that the waterfall is working by comparing the % of total cash flow to each partner: The LP will receive 80% and the GP 20%. Due to its popularity in private-equity deals, the 80/20 catch-up is often found in real-estate equity waterfalls—mostly on institutional transactions. Given the versatility of this model, I plan to add it to our A.CRE All-in-One model in the near future. Allow me to show you how to use this model. The GP usually commits some amount to the fund, usually 1 to 2% of the commitment. So if the LP was distributed 500,000 in profit in order to hit its preferred return and the Sponsor promote level is 15%, the Sponsor will be distributed in its catch up the lesser of any cash flow remaining or 500,000/(85%) x 15% = 88,235 ; which equates to 15% of the total profit required to get the LP to its preferred return. If you continue to use this site we will assume that you are happy with it. Then, 100% of all excess cash flow is distributed to the Sponsor (i.e. With insufficient property-level cash flow for the LP to achieve its preferred return, the Sponsor will be obligated to return its promote paid during operation (see row 27 – Sponsor Distribution and row 81 – Sponsor Adjusted Distribution), Property-Level Cash Flows. For a general overview of waterfalls, check out Investopedia. In other words, “$100 is 80% of what?” mathematically translates to $100 = .80x. How to Build: Construction Loan Draw in Excel, 30 Nov 2019 In this installment of How to Build, I build a simple construction loan draw in Excel. Your first instinct might be to ask, “Well, what’s the total?”. Due to its popularity in private-equity deals, the 80/20 catch-up is often found in real-estate equity waterfalls—mostly on institutional transactions. Fairfield, CT 06825-2400, Video Tutorial: Building a Waterfall with an 80/20 Catch-Up in Excel. After Tier 2, cash flows are split 80% to the LP and 20% to the GP. (With the caveat that there are ways to make this structure infinitely more complex, and institutional investors love making things more complex.). Just enter a price together with an email address to send the download link to, and then click ‘Continue’. The general logic of the model works as follows: Allow me to now discuss each of the inputs in this module, and then I’ll finish with a quick video walk-through of the tool. With this module, you can. If you have questions, please don’t hesitate to reach out. For this module to work properly, you will need to link the levered property-level investment cash flows (i.e. The total is the $100 received by the LP in Tier 1 divided by 80%. Note: If you’re an A.CRE Accelerator member, click here access the thread where we discussed how to custom build catch up and clawback provisions. This equity waterfall module is one of the more versatile that I’ve built for the A.CRE Library of Excel Models. He is currently Head of Real Estate Investments and member of the founding team at Stablewood Properties. So if you’ve used them, this will feel familiar. The three sponsor fee types added are acquisition/development fees, asset management fees, and disposition fees. In terms of what this tool can do. Over his career, he has underwritten $30 billion of commercial real estate at some of the largest institutional real estate firms in the world. I also created a video for you to watch and provided an example Excel file to download. Sponsor Catch Up) and LP Clawback provisions. While no equity waterfall module can do it all, this particular module covers many of the common structures you might run into – both in the United States and internationally. In Tier 2, the GP should receive all cash flows until it is 20% of the total. In reality, it’s just basic arithmetic. Any promote distributed to the Sponsor during operation is subject to the Clawback if the LP does not reach its preferred return hurdle at the capital event. Paid contributors to the model receive a new download link via email each time the model is updated. We use cookies to ensure that we give you the best experience on our website. Download the Real Estate Equity Waterfall Model with Catch Up and Clawback. That’s all there is to it. This is a comprehensive update to [...], 2490 Black Rock Turnpike, #339 You can test this by setting the Sponsor promote during operation (cell F11) to a value greater than 0 and then setting the ‘Reversion Cash Flows’ to 0. negative acquisition and development cash flows from your, Fixed issue where in edge cases, Distributions turned negative, Fixed issue where in edge cases, LP Clawback turned negative, Fixed issue in ‘Cash Flow Available for Distribution’ line under ‘Capital Event’ section to properly distribute mid-hold capital events, Added GP Catch Up Error Check logic to confirm accuracy of catch up, Sponsor fees included in Sponsor cash flow and return calculation, Updated tier cash flows to reflect sponsor fees, Fixed an error in the Tier 1 Distribution row where in rare instances, the Tier 1 cash flow exceeded the hurdle, Fixed an error where GP Distribution % in Tier 3 was incorrect, Added logic to handle rare situations where there is a period with negative Investment CF. If you have any questions about our “Pay What You’re Able” program or why we offer our models on this basis, please reach out to either Mike or Spencer. We regularly update the model (see version notes). Call that $100. So allow me to introduce the ‘Real Estate Equity Waterfall Model with Catch Up and Clawback’. To make this model accessible to everyone, it is offered on a “Pay What You’re Able” basis with no minimum (enter $0 if you’d like) or maximum (your support helps keep the content coming – similar real estate equity waterfall … This template allows you to create your own PE distribution waterfall for returning capital to the LPs, GPs, etc with different fund … In this model, we use the following structure: For most, Tier 2 is the confusing part. We will go through a waterfall model example in order to understand better how to build an investment waterfall model for a Private Equity / Real Estate deal.

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