This model is setup so that the cash flow splits between the LP and GP are based on the total cash that has been distributed to the LP over time. As the LP receives cumulatively more distributions, the cash flow share can be adjusted. It runs for up to 60 periods (to give max usability for annual or monthly period) and includes final effective percentage share per period and overall IRR for the periods defined. If it is a monthly analysis, just multiple the IRR by 12.
The model will work for up to 6 tiers and if you have less simply enter the 'thereafter' rate in all subsequent tiers. The whole reason why people use these kinds of deals is because the LP has clarity on what amounts they require before they give up more of the cash flow. It is a bit easier to understand this compared to IRR hurdles or even equity multiple hurdles.
Essentially, the LP is saying they will give up more of the cash flow if the absolute distributions to them reaches certain tiers. It gives incentives for the GP / operator to do better and still gives the LP guarantees about the share of cash flow they will receive up to certain cumulative distribution amounts.
The model could be set such that until the LP receives 100% of their investment back, cash is split x/y to sort of work like preferred equity or it could be pari passu until the initial investment is returned. You can format all kinds of deal strategies with this template. It is just a matter of the initial hurdle amount.
Usually the contributions will always be higher for the LP than the GP at the start and that is the only reason this is used (to eventually give the GP a higher return than pari passu) or the GP may not contribute any capital and the cash flow splits would reflect that.
The hurdle amounts and cash flow splits can be configured to any number that is required and all the logic automatically updates.
One of the most difficult pieces of this is doing distributions in-between hurdles, for example if some of the cash in a period needs to be split 80/20 and then some needs to go to the next hurdle since that period exceeds a given hurdle amount. The model handles that very elegantly and accurately.
The effective percentage share per period is displayed as well as the share per hurdle and aggregate per hurdle are all shown so you can check and see the granular outputs match the configuration table as a check.
More Joint Venture Cash Flow Waterfall Templates:
- Preferred Return - Multiple GP Catch-up Options
- Preferred Return
- Preferred Equity with a Subordinate IRR Hurdle Waterfall
- Preferred Equity (equity multiple hurdle)
- General Cash Flow Waterfall: 3 IRR Hurdles
- General Cash Flow Waterfall: 3 IRR Hurdles and GP Catch-up Provision
- Preferred Return - Simple Interest / Multiple Hurdles / Non-Compounding
- Preferred Return Fund Tracker
- Mixed-Use Real Estate
- Multi-family Real Estate Acquisition
- Joint Venture Model - IRR Hurdles / Waterfall
- Hedge Fund Fee Model
- Self Storage: Multi-Fund
