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A popular topic in the REFM Training curriculum is that of equity joint venture partnerships. With today’s increased equity capital requirements, everyone wants to know about preferred returns, promotes, and waterfalls, how to represent them in a spreadsheet, and how to set up the best structure to meet their goals.
The 60-second version. An equity partnership is a collaboration of two or more parties, the transaction’s Sponsor (developer or owner) and an investor (or investors), which pools both cash and talent to financially enable and operationally execute a real estate transaction. The Preferred Return, or “pref”, is a priority return on cash invested, the Promote is an additional share of profits granted to the Sponsor above and beyond their pro-rata cash invested, and the Waterfall is a fancy way of providing a successively larger Promote to the Sponsor the better the transaction performs. In this way the Sponsor has a financial incentive to pay close attention and strive to outperform for the life of the transaction