I spoke with developers recently. They were telling me their pain points when it comes to waterfalls and distributions. They underwrote a deal in which they’ll make a profit for a few years, then do construction (which they’ll raise more capital for), and after that, they will refinance and hold for 10-15 years. Their issue is that their returns and IRR for both the GP and LP weren’t adding up. I brought up a few good points for them to start looking into and asked them how they would solve these issues. Was their model created for construction and to handle multiple capital injections? What happens when you have different investors contributing at different times? When is capital being returned? All of these issues are common occurrences and need complex solutions to resolve. Everyone wants a simple waterfall, but every case is unique. How do you answer these questions when you are underwriting? If you need help structuring and organizing these types of distributions, reach out and let’s chat. --- If you found value in this post, please like and comment. Follow for more content! If you want to receive my newsletter, direct message me! Any distribution or waterfall questions? Reach out! Need help setting up or calculating a waterfall? Reach out.
My splits sheet you just overwrite actuals whether positive or negative and it calcs. Its a split management tool too, not just for proformas. Why would the partners be making capital infusions at different times?
Eytan Goldstein
8mo
It's remarkable at times how much more complicated development models are than simple acquisition models. Often the additional info and complexity is necessary, but there is usally a lot of room to simplify things further.
Ify Asoh, PharmD
8mo
Ahhh were they using the same model to underwrite for all deals? Each project is different and should be handled as such
Margo Masri
8mo
Addressing the complexities of waterfalls and distributions is crucial for accurate underwriting. Ensuring the model accommodates construction phases and multiple capital injections is essential.
Gary Schwartz your foresight is priceless!
Interesting points on real estate deal complexities. How about a tiered model for better return alignment?
Empowering Professional Father's to Achieve Financial Freedom through Strategic Real Estate Investments Expert in Passive Income Solutions
8moGary Schwartz, while I certainly appreciate your knowledge and what you share, it also terrifies me. It is one thing when you are sharing this knowledge to the LPs: people that are not expected to understand the nuances of a waterfall, both the legal and financial ramifications. But it SHOCKS and TERRIFIES me when operators, in this case developers, but also acquirers, don't understand how the money flows. When a real estate person starts taking outside investment, you are no longer a real estate person. You are an investment manager whose product is real estate. You are selling returns now, not real estate. Not that I need to ask, but please keep these coming. I hope it will educate the investors to start being able to decipher what an experienced, knowledgeable GP looks like. And as for buying a model, there are some great ones out there. But again, it takes a knowledgeable GP to know which are good and creating outputs that make sense, versus those that are junk.