A Beginner's Guide To Real Estate Equity Waterfalls

A Guide To Real Estate Equity Waterfalls // Real estate private equity can be a really lucrative industry to work in (or start a company in), and a huge reason for that is the existence of promoted interest.
​​Promoted interest allows an individual investor raising capital or (most often) an investment or development firm raising capital to earn an outsized percentage of the profits on a deal, over and above their original equity interest.
​​This amount is determined by what’s referred to as an equity waterfall structure, and while the details of these can get pretty complex, in this video, I want to break down what a typical equity waterfall structure actually looks like in commercial real estate, how these structures tend to function in practice, and the calculations behind these that end up driving the cash flow splits between investors on a real estate deal deal.
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🕒 Timestamps 🕒
0:00 Introduction
1:03 Promotes & Hurdles
4:40 Catch-Ups
6:24 Clawbacks
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*Nothing in this video should be construed as tax, legal, accounting, valuation, or financial advice or recommendation. All information in this video is intended solely for educational purposes, and you are advised to consult with your own personal professional advisors regarding your personal investment decisions.
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[@BreakIntoCRE]

Any specific waterfall structures you want to see a deeper dive on in a future video on the channel?

[@matthewcandler4179]

How it looks if there is a large JV special partner with special terms above this.

[@philiplee9706]

so what are the values to enter in your model which has a 4 tier promote structure when I just have a simple structure of a 12% hurdle and 50% profit share after the hurdle. Do I use a 88% IRR in tiers 2-4 so that the profit share in these tiers can never happen

[@BreakIntoCRE]

@@philiplee9706 yes - if there is only a 12% IRR-based preferred return, Hurdle #2 and Hurdle #3 could both be set to unacheivable IRR figures (999%, for example) to incorporate the single hurdle within the partnership structure. Feel free to post in the Q&A directly in the course if you have other questions on this. Thanks!

[@user-kw6im1bs1l34]

Real estate investors losing money is music to my ears. They are a major reason why the real estate market is the way that it is now.

[@user-yk7yf6ow8s09]

The best course of action if you lack market knowledge is to ask a consultant or investing coach for guidance or assistance. Speaking with a consultant helped me stay afloat in the market and grow my portfolio to about 65% since January, even though I know it sounds obvious or generic. I believe that is the most effective way to enter the business at the moment.

[@user-bw5ws8fr9t12]

I think this is something I should do, but I've been stalling for a long time now. I don't really know which firm to work with; I feel they are all the same but it seems you’ve got it all worked out with the firm you work with so i surely wouldn’t mind a recommendation.

[@user-yk7yf6ow8s09]

STEPHINE KOPP MEEKS is who i work with look her

[@user-bw5ws8fr9t12]

Thanks for recommending i find her and left her message online

[@jordyngegg6638]

Love your videos! Question, assuming LP & GP were paid 6% pari passu annually (pref is 6%), during a refi would both parties (or just the LP?) get their capital returned before dividing up excess returns via promoted interest?

[@faustocarosella795]

Your Videos are great! but dumb question: Does one have to have a bachelors (or higher) degree to land a job doing the modeling? Or would practical experience underwriting smaller multifamily deals in conjunction with your course be something a smaller firm might consider?

[@elrond7887]

You likely aren’t going to get into a big name company without a bachelors degree or years of experience first. I’d recommend doing a course but then get into a sales role first with a smaller firm to get some experience.

[@BreakIntoCRE]

Not a dumb question at all - most CRE firms (both investment and brokerage) do require a 4-year degree for analyst and associate roles. There are some exceptions to this rule at smaller start-up shops, but in the vast majority of cases (especially at larger firms), a 4-year degree is a requirement to be considered for an analyst position.
Thanks for your support of the channel!