Over the years, my real estate equity waterfall with annual periods and the option of using either IRR or Equity Multiple Hurdles has been one of the most popular models download at Adventures in CRE. I’ve received dozens of requests for how to improve the model, and so I thought I’d incorporate some of those changes into an updated version.
Note: As of version 1.3, this model includes the option to model a GP IRR Catch Up when the GP’s distribution % in tier 1 (i.e. the Preferred Return + Return of Capital tier) is less than its ownership share.
About this Real Estate Equity Waterfall Model
The model allows for up to four tiers (IRR or equity multiple hurdles), with the first tier paying a preferred return, pari-passu, to the sponsor and LPs after the full return of capital to the partners based on their proportionate share of equity contribution. Tiers two through four model a promote paid to the sponsor at a proportion greater than its relative share of equity contribution.
Working with a less-complicated real estate partnership structure? Check out my Real Estate Equity Waterfall Model with Cash-on-Cash Return Hurdle
Real Estate Equity Waterfall as a Module
This equity waterfall model is built for inclusion in other models – or in other words it is not standalone. As a result, it assumes you have already modeled the total equity required, and have calculated the net cash flow stream before taxes but after debt service (equity cash flow).
It is built on an annual basis for up to 15 years of analysis, and assumes only one sponsor (GP). While the model is simple, the foundation is there to easily add additional IRR or Equity Multiple hurdles, years of analysis, or partners. Also, with a little more effort, the model can be adjusted to use both equity multiple hurdles and IRR hurdles together.
Needing a similar waterfall model but with monthly, rather than annual periods? Download my Real Estate Waterfall Model with Monthly Periods.
Video Walkthroughs of the Real Estate Equity Waterfall
I recorded this video nearly three years, and as a result several of the inputs and outputs are out-of-date. In the coming weeks, I’ll record an updated video including the new features and changes added to the current version of the model.
Original Walkthrough (Based on Older version)
Quick Tutorial on How to Adjust Hold Period
Download the Real Estate Equity Waterfall Model with IRR and Equity Multiple Hurdles (Annual Periods)
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). Just enter a price together with an email address to send the download link to, and then click ‘Continue’. 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). Paid contributors to the model receive a new download link via email each time the model is updated.
A bit of history behind the progression of this model:
- I first built this model with IRR hurdles only, and then followed up with a companion waterfall model using equity multiple hurdles. After concluding the models were redundant, I converted this model into a combined model with both IRR and equity multiple hurdles. You can toggle between IRR hurdles and Equity Multiple hurdles using the drop-down menu in cell D4 of the ‘Partnership Returns – Annual’ tab.
- Another common request we’ve received over the years is to model the waterfall using monthly, rather than annual, periods. Monthly waterfall modeling is common with shorter term, more opportunistic real estate investments. Again, rather than boggin this model down with too many options, I created a separate equity waterfall model with monthly periods.
- In many of my standalone models on A.CRE, I’ve added this equity waterfall model with minor tweaks from one model to the next. For instance, you can find this model included in my Real Estate Portfolio Acquisition Model, as well as in my All-in-One Model.
- In mid-2019 (v1.3 and newer), I added a GP IRR or EMx Catch Up option for scenarios when the LP receives a greater share of the cash flows in the first tier.
v1.4 – Sept 14, 2019
- Updated to new versions tab
- Added year header above each tier
- Updated to a more modern header design
- Removed blue background on input cells, to be consistent with formatting norm (i.e. formatting best practices)
- Renamed Tier 1 to “Return of Capital & Hurdle 1 (Preferred Return” for better clarity
- Misc. formatting enhancements
v1.3 – May 31, 2019
- Added option to model GP IRR and Equity Multiple Catch Up
- Added drop-down menu to use GP Catch Up or not
- Catch Up option appears when GP’s ownership share is >0% but it’s distribution % in tier 1 is less than it’s pro rata ownership share %
- Fixed issue where IRR check label was not working properly when using Equity Multiple hurdles
- Fixed issue where Equity Multiple number formatting was returning a percentage instead of 0.00X
- Replaced VLOOKUP() functions with non-volatile formulas
v1.22 – December 10, 2018
v1.21 – July 13, 2018
- Added logic to make adjusting hold period more intuitive; simply delete Net Levered Cash Flow from any years not included in the analysis, and those years will no longer appear
- Fixed circular reference in asset management fee input row
v1.20 – June 17, 2018
- Added option to model sponsor fees; can include up to two different sponsor fees (e.g. AUM fee, acquisition/disposition fee)
- Removed reference to USD to better support non-US users
- Renamed tab to ‘Partnership Returns – Annual’, to better reflect purpose of module
- Various formatting improvements
- Revised ‘Error Check’ formula to account for rounding errors
- Simplied hurdle 1 modeling; no longer tracking sponsor capital account
- Improved version tracking
v1.10 – December 29, 2017
- Added option to use Equity Multiple hurdles, rather than IRR hurdles (cell D4)
- Miscallaneous bug fixes
- Added link to waterfall module with monthly periods
About the Author: Born and raised in the Northwest United States, Spencer Burton has over 15 years of real estate investment and development experience. In his current position, Spencer assesses new acquisition, development, and debt opportunities for a $45bn real estate fund. He resides in Dallas, TX.