We regularly get a question about the difference between the Promote input and the Distribution % calculation (i.e. “Dist. % to GP” or “Dist. % to LP”) in several of the real estate equity waterfall models shared to A.CRE.
In our waterfall models, ‘Distribution %’ refers to the proportion of cash flow in a given waterfall tier distributed to a given partner. Promote refers to an incentive paid by the partnership to the GP/Sponsor when the investment has achieved certain profit thresholds (i.e. the Preferred Return). If the GP/Sponsor being paid the promote has contributed capital to the partnership, the promote will NOT equal the Distribution %. That is because the GP/Sponsor, as a member of the partnership, is paying a portion of the Promote.
To further explain this concept, below find an excerpt from our Accelerator real estate financial modeling training program, course 15, lesson 3 of the core curriculum:
Allow me to quickly teach you how to calculate the distribution percentages based on a given promote.
- Assume a structure where the promote is paid by the partnership.
- Assume the GP owns 10% of the partnership, while the LP owns 90%.
- Assume all distributions are made pro rata based on each partners ownership share.
- Assume the GP is promoted 20% after the LP achieves a 12%.
Here is language that might represent this structure.
First, each distribution will be made to the partners in accordance with their partnership percentages until the Limited Partner has achieved the 12% promote hurdle; and second, the balance will be distributed (a) 80% to the partners in accordance with their partnership percentages, and (b) 20% to the General Partner as a promote.
So how do we calculate the distribution percentage to each partner above a 12% hurdle?
The formula to calculate Distribution % for the GP looks like this:
GP Distribution % = Promote % + (Pro Rata Share x 1 – Promote %)
The formula to calculate Distribution % for the LP looks like this:
LP Distribution % = 1 – GP Distribution %