Who gets the cash when the building sells, the LPs or the GP?
Say the LPs, the investors, put $10.0M into a building, and the GP, who runs the deal, sells it 5 years later. The lender is paid off and $25.0M is left for the equity. That cash fills the tiers of the waterfall one after another: the LPs get their money back first, then their 8% a year, and only then does the GP start to take a cut of each tier, which is the promote. Drag the cash and the years and watch each tier fill, split, and fall into its row.
Where the cash went
The LPs get$22.23M2.22x, 17.3% a year
The GP’s promote$2.77M11% of the cash
Top tier reached60 / 40every dollar past $21.47M
The cash from the sale sits on top, split into its tiers, with a dotted line where each tier ends. Inside a tier the lighter part is the LPs’ and the darker part is the GP’s. The ribbons carry each part down to its row.The cash on top, by tier, with a dotted line where each tier ends. The darker end of a tier is the GP’s cut. The ribbons carry each part down to its row.
Capital back at $10.0M8% a year at $14.69M15% a year at $21.47M
Cash from the saleCash$25.0Mafter the loan is paid off
Capital backCapital$10.0M8% prefPref$4.69M80 / 20 tier80/20$5.42MGP$1.36M60 / 40 tier60/40$2.12MGP$1.41M
The GP’s promoteThe GP$2.77M11% of the cash
80 / 20 tier$1.36M60 / 40 tier$1.41M
The LPs getThe LPs$22.23M2.22x, 17.3% a year2.22x17.3% a year
Capital backCapital$10.0M8% prefPref$4.69M80 / 20 tier80/20$5.42M60 / 40 tier60/40$2.12M
$0$5.0M$10.0M$15.0M$20.0M$25.0M$30.0M$35.0M
Capital back8% pref80 / 20 tier60 / 40 tierThe GP’s cut, the darker part of a tier
$25.0MLeft for the equity after the loan is paid off. The LPs put in $10.0M.
$5.0M: the deal lost money$35.0M: a home run
5 yearsBy then the 8% pref needs $14.69M and 15% a year needs $20.11M.
1 year: a quick flip10 years: a long hold
What just happened
The sale left $25.0M for the equity after the loan was paid off. The first $10.0M went back to the LPs, and the next $4.69M was their 8% a year for 5 years. Every dollar after that split 80 / 20 until the LPs reached 15% a year, which took $6.78M of cash: $5.42M to them and $1.36M to the GP. The last $3.53M split 60 / 40: $2.12M to the LPs and $1.41M to the GP. The LPs end with $22.23M, 2.22x their money and 17.3% a year. The GP’s promote is $2.77M, 11% of the cash.
Relevant formulas
The 8% hurdlethe LPs’ money, grown at 8% a year for the years held$10.0M × 1.08^5 = $14.69M
The 15% hurdlethe same money, grown at 15% a year$10.0M × 1.15^5 = $20.11M
Cash to reach 15%the 8% hurdle, plus the gap to the 15% hurdle divided by the LPs’ 80% share of that tier$14.69M + ($20.11M − $14.69M) ÷ 80% = $21.47M
Capital backthe first dollars, all to the LPs$10.0M
The preffrom the capital up to the 8% hurdle, all to the LPs$14.69M − $10.0M = $4.69M
The 80 / 20 tierfrom the 8% hurdle up to $21.47M, 80% to the LPs and 20% to the GP$6.78M × 80% and × 20% = $5.42M and $1.36M
The 60 / 40 tiereverything past $21.47M, 60% to the LPs and 40% to the GP$3.53M × 60% and × 40% = $2.12M and $1.41M
The LPs’ multiplewhat they get divided by what they put in$22.23M ÷ $10.0M = 2.22x
The LPs’ return a yearthe multiple, taken back to one year2.22x^(1/5) − 1 = 17.3%
The GP’s sharethe promote divided by all the cash$2.77M ÷ $25.0M = 11%
The hurdles are measured on what the LPs receive, with one payout at the sale and nothing before it, so each one is a single dollar amount. If the GP puts its own money in alongside the LPs, that money is paid like LP money; the promote is the extra the GP earns for running the deal. Some deals add a catch-up tier that goes 100% to the GP after the pref. This one does not.
Ask AI about this module
Answers come from Claude and can be wrong. The formula card is the source of truth.