1. The deal
Year 1 is one year after the equity goes in. Use cash after debt service, reserves and fees, before any split between partners.
2. Preferred return and promote tiers
Up to the preferred return, cash goes to all partners pro rata to capital. In each later tier the sponsor takes the promote percentage of that tier's cash and the rest goes to all partners pro rata.
Enter the equity and the yearly cash flow, then click Calculate.
Result
By tier
| Tier | Cash | To all partners | Promote |
|---|
By year
| Year | Cash | To all partners | Promote |
|---|
What this does not cover
- Your operating agreement. Real waterfalls differ: GP catch-up, simple rather than compounding pref, hurdles on equity multiple, return of capital before pref, separate classes. The document controls.
- Fees and expenses (acquisition, asset management, disposition) are not modelled. Take them out of the cash flows you enter.
- Annual periods only. Monthly or quarterly distributions give slightly different IRRs.
- Taxes and the timing of capital calls are ignored; all equity goes in at time zero.
- Not an offer. This is arithmetic, not a solicitation or recommendation to buy or sell any security.
Common questions
What is a distribution waterfall?
The order in which a real estate deal's cash is paid out. Typically all partners first get their capital and a preferred return pro rata, then the sponsor (general partner) earns a growing share of each extra dollar, called the promote, as the investors' IRR clears higher hurdles.
What is a preferred return?
A minimum annual return, such as 8%, that investors must receive before the sponsor earns any promote. It usually compounds on unreturned capital, and this calculator compounds it annually.
What is a promote?
The sponsor's share of profits above the preferred return, on top of the share it earns as a co-investor. A common structure is 20% above an 8% pref, rising to 30% above 12% and 40% above 15%.
What is the difference between deal IRR and LP IRR?
Deal IRR is the return of the property before splitting. LP IRR is what passive investors keep after the sponsor's promote. The gap is the cost of the structure to the investor and the sponsor's reward for running the deal.
Is this investment or legal advice?
No. This tool does arithmetic on the numbers you enter with a simplified waterfall. It is not an offer or solicitation of securities, and the operating agreement, not this tool, controls real distributions. Use a securities attorney and a CPA.