Nov 24, 2004
I am trying to model the distribution of cash flows from a real estate investment. This is a bit complicated, but basically A1 through A37 are a series of cash flows after payment of debt service from month 0 (closing) to month 36. The real estate project has two investors, the Institutional Investor and the Developer. In this case, the Institutional Investor contributes 90% of the required project equity and the developer contributes the remaining 10%. The cash flow is distributed according to a set of parameters specifying cash flow percentage allocations and IRR targets, collectively known as a "cash flow waterfall"." As with all for-sale residential development deals, the early cash flows are negative and then turn positive as unit sales occur. The order of distribution of the cash flow remaining after debt service is paid is as follows (the waterfall):
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1. Both investors receive the return of their invested capital from cash flow distributions.
1. Hurdle 1 (after the return of equity to both investors), the Institutional Investor receives 90% of the monthly cash flows and the Developer 10%, proportional to their respective overall equity contributions, until both investors achieve a 12% IRR (all IRR's to be calculated from deal inception/first dollar invested).
2. Hurdle 2, (after Hurdle 1 is satisfied), the Institutional Investor receives 60% of the monthly cash flows until the Institutional Investor achieves an 18% IRR.
3. The Final Split (after satisfying Hurdle 2) allocates monthly cash flow 50% to each investor.
On an overall project basis, the Developer should realize a disproportionate share of the cash flow after the second hurdle is hit. This is what is known as the "promote." The most recent 36 month (37 including Closing) projected cash flows are as follows:
($1,315,567) - Closing
($113,697) - Month 1
I realize this is complicated, but this structure is quite common to real estate, private equity, venture capital and hedge fund investments (along with most any joint venture deals with multiple classes of equity participants). The canned software that is out there that performs this type of anlysis is both expensive and rigid, and doesn't typically enable the required sensitivity analysis in structuring a deal.