Sometimes the calculations were just wrong (thankfully, not too often), sometimes they were incomplete, and often the full complexity of the waterfall couldn’t be captured in one spreadsheet so managers would resort to manually plugging numbers into their models based on one-off side calculations, which inherently increases the risk of errors.Īnd that leads to the second issue: Excel models have this unique combination of being both highly error-prone (it’s not hard to fat-finger the wrong number into a cell) and also highly difficult to audit, which causes mistakes to go unnoticed and compound over time.Įrrors run the gamut: hard-coding values that shouldn’t be hard-coded, linking to the wrong cells, neglecting to expand formulas across a row or down a column.įurther, as models get handed off from one team member to another, we commonly find inconsistencies across calculations within the same investment over time. Since real estate is most often a cash-flowing asset, investors expect a baseline yield to be paid before any splits can be contemplated. Consider this preferred return akin to interest earned in a bank account. Real estate LPs usually expect a preferred return before GPs receive any profit splits. Those familiar with the typical “2 and 20” model of the hedge fund world, where managers start splitting any profits immediately, will note a unique order of operations for real estate distributions. The share that goes to the GP is commonly referred to as the promoted interest, or “promote.” The split is commonly around 20% to the GP and 80% to the LP, but it could be as high as 40% to the GP and 60% to the LP, or even 50%/50% in exceptional circumstances.
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