Real Estate Ventures: Formulating and Interpreting Promote Hurdles and Distribution Splits

    By Stevens A Carey

    Real Estate Ventures: Formulating and Interpreting Promote Hurdles and Distribution Splits

    Real Estate Ventures: Formulating and Interpreting Promote Hurdles and Distribution Splits

    By Stevens A Carey

    This book explains, compares, and quantifies the different approaches when formulating and interpreting how distributions in a real estate joint venture are shared by a financial partner and an operating partner. It is a useful resource for anyone who works with distribution waterfalls in a joint venture context, from the lawyers who draft the documents to the asset managers who administrate the transaction and the accountants who may be involved at any point.

    Real Estate Ventures: Formulating and Interpreting Promote Hurdles and Distribution Splits

    By Stevens A Carey

    Real Estate Ventures: Formulating and Interpreting Promote Hurdles and Distribution Splits

    Real Estate Ventures: Formulating and Interpreting Promote Hurdles and Distribution Splits

    By Stevens A Carey

    This book explains, compares, and quantifies the different approaches when formulating and interpreting how distributions in a real estate joint venture are shared by a financial partner and an operating partner. It is a useful resource for anyone who works with distribution waterfalls in a joint venture context, from the lawyers who draft the documents to the asset managers who administrate the transaction and the accountants who may be involved at any point.
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    Real Estate Ventures explains, compares, and quantifies different approaches commonly taken when formulating and interpreting how distributions are shared by a financial partner and an operating partner (when the operating partner is entitled to a "promote" or"carried interest" after a certain level of distributions) including:

    • IRRs vs. preferred returns
    • Allowing promote hurdle balances to go negative when there is a surplus vs. not doing so
    • Using continuous compounding (in effect) vs. discrete compounding with simple returns between compounding
    • Employing separate compounding periods for each cash flow vs. fixed compounding periods for all cash flows
    • Using timing conventions, such as assuming all cash flows occur at the beginning or end of a period

    The book also identifies other points to consider in formulating or interpreting a promote hurdle, pointing out common mistakes to avoid and offering practical solutions. These include:

    • Basic financial terminology and some common misconceptions and confusion, such as APRs, annualized IRRs, and effective rates
    • The complexities of simple interest and how it may be involved even when there is compounding
    • Multiple IRRs and how to avoid them when there are multiple IRR hurdles

    The book begins with background on the topic and summarizes the basic issues and concepts related to promote hurdles. Information is presented in four parts:

    Part A: An accessible, question-and-answer presentation of the basic issues and highlights about the topic, including the differences between preferred returns and IRRs.

    Part B: A summary of the basic issues and concepts relating to promote hurdles, as well as a more detailed treatment of the differences between preferred returns and IRRs, a discussion of soft hurdles, and of recycling profits, one of the key potential differences between IRR and preferred return/return of capital hurdles.

    Part C: General background and analysis of three alternative approaches to calculating promote hurdles, how each has arisen historically, and in particular, how these approaches relate to (and may incorporate) preferred returns and IRRs.

    Part D: Chapters more technical in nature addressing some of the confusion associated with "multiple IRRs" and "effective rates" along with a practical solution to avoid multiple IRRs in the context of multiple promote hurdles.

    Product Details

    Authors

    Stevens A Carey

    Sponsors

    Section of Real Property, Trust and Estate Law

    Publishers

    ABA Book Publishing

    ISBN

    9781634253345

    Page Count

    582

    Product Code

    5430817

    Trim Size

    7 x 10 Paperback

    Publication Date

    3/7/2016 12:00:00 AM

    Authors

    Stevens A Carey

    Sponsors

    Section of Real Property, Trust and Estate Law

    Publishers

    ABA Book Publishing

    ISBN

    9781634253352

    Page Count

    582

    Product Code

    5430817EBK

    Trim Size

    7 x 10

    Publication Date

    5/20/2016 12:00:00 AM

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