Over the years, this real estate equity waterfall with annual periods and IRR or Equity Multiple hurdles has been one of the most popular models in our library of real estate Excel models. It’s been downloaded thousands of times and we’ve received dozens of suggestions for how to improve the model. As a result, we continue to update and improve the model as we find time and based on the feedback we receive.
Recently, I’ve also been working to update the walkthrough videos that accompany each of my models. In December 2019, I updated the walkthrough video for this model. The video uses v1.5 of the model and incorporates all of the enhancements to-date. You can find the latest version of the model, the updated walkthrough video, and a changelog for the model below.
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). The first tier distributes cash flow to the partners until the LP has achieved some defined preferred return and received a full return of capital. Distributions in the first tier can either be pari-passu and pro rata based on the partners’ proportionate share of equity contribution, or LP first. If the distributions are LP 1st in the 1st tier, the model offers the option for the GP to catch up to the LP.
Assuming the preferred return hurdle is hit in tier one, cash flow is distributed in tiers two through four based on a defined promote structure and hurdle rates as outlined by the user. The hurdles can either be internal rate of return (IRR) or equity multiple hurdles.
If you are needing a less complicated model, you might check out my Real Estate Equity Waterfall Model with One 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 property-level cash flow in your own DCF. With that, you can link the net levered cash flow line from your property-level model to this module.
Most of our real estate DCF models include both a property-level cash flow module as well as a waterfall module (i.e. partnership-level module). In fact, several of the models in our library of real estate Excel models have this exact real estate equity waterfall module built-in.
Dynamic Annual (Not Monthly) Periods
The model is built on an annual basis for up to 15 years of analysis. The analysis length is fully dynamic – simply link the model to your net property-level cash flow and leave any unnneeded years blank. The model will recognize those years as unnecessary and hide them from the analysis. You can find a video tutorial on how to adjust hold period further down the page.
Other Elements of the Module to Consider
This waterfall model assumes only one sponsor (i.e. GP) and one LP. And while the model is simple, the foundation is there to easily add additional IRR or Equity Multiple hurdles, years of analysis, partners, duplicate the worksheet to model a double promote.
Also, with a little more effort, the model can be adjusted to use both equity multiple hurdles and IRR hurdles together.
Video Walkthroughs of the Real Estate Equity Waterfall
I recorded a video walkthrough that includes all of the new features in the model since its release through v1.5. These new features include the addition of the Equity Multiple hurdle, the option to include a GP Catch Up provision, a dynamic hold period of up to 15 years, and various tweaks and improvements.
Quick Tutorial on How to Adjust Hold Period
In this quick 30 second tutorial, I show you how easy it is to adjust the analysis period. If you’d like to incorporate this concept yourself, take a look at the =IF(XX=””,”” logic that I use at the beginning of each of my formulas. This logic looks to the header row and asks if the header is blank, and if so it will leave that cell blank. Add that logic to each of your cells, and the result is a model fully dynamic to 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.
- In December 2019, I updated the walkthrough video to incorporate the changes in the model to date.
v1.5 – Dec 8, 2019
- Updated walk-through video to include all changes since initial release
- Added mini-tutorial videos for modeling GP Catch Up and for modeling GP Fees
- Added new instruction notes and revised existing notes
- Set waterfall calculation section to hide/unhide with one click; set to hidden by default
- Updated print range, and set instruction notes not to print
- Renamed various labels for consistency (e.g. ‘hurdle’ renamed ‘tier’)
- Moved to ‘Accounting’ number format
- Revised header row
- Changed Sponsor to GP for consistency
- Misc. formatting updates
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
- Cleaned up Promote Structure inputs and notes to make it more clear how Sponsor is being promoted
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.