I’ve created a companion to my real estate equity waterfall model to work with equity multiple hurdles, rather than IRR hurdles. It took me longer than I expected to build this, largely because I was over thinking it. I messed around with IF statements, and adding rows, and a whole lot of other ideas that were unnecessary. In the end, after scrapping my earlier versions and starting over, the solution was simple.
Rows 39, 53, and 68 calculate the “required return to the LP”, right? Well, all that needed to happen was to change how those three rows calculated the required return to the LP. I altered the ‘Promote Structure’ (B10:I13) to use equity multiple values instead of IRR values, and then added a formula in the required returns rows that essentially looked at the contributions from the LP in the previous period, and calculated the equity multiple that would need to be realized based on those contributions before flowing to the next hurdle.
In the coming days, I’ll record and post a video discussing the changes and how they might affect your models. The video will also provide a brief tutorial on how to setup the promote structure.
This is version 1.0, and so there may be errors. Let me know if you find any, and I’ll be happy to correct them. In the coming weeks, I’m planning to work on an all-in-one real estate equity waterfall model that will incorporate IRR hurdles, equity multiples hurdles, and let the user choose whether to use one, the other, or both in their waterfall calculations.
NOTE: Since writing this post, I’ve combined my IRR and equity multiple waterfall models into one. While this post still describes the methodology used to model equity waterfalls based on an equity multiple promote structure, the Excel file download includes the new, combined model.
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Real Estate Equity Waterfall Model - Annual with IRR and Equity Multiple Hurdles
- Up to a four tier promote structure
- IRR or equity multiple hurdles
- Pari-passu return of capital; possible to create senior/junior equity structures
- Easy to add to your existing model
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