minimum level of return prior to sharing in any of the profits with the sponsor by way of a performance compensation, or promote. Sponsors should be incentivized to outperform the preferred return, which is usually 6% to 10%, so they can make money through their promote based on the waterfall. In multifamily investments, the most common waterfall is an 8% preferred return followed by a 70/30 split (70% of remaining profits owed to investors and 30% of remaining profits paid to the sponsor as their promote compensation). There are additional nuances related to preferred returns, waterfalls, and control rights within equity partnerships which are outside the scope of this article.
To learn more about not only structuring the right deal, but also raising the debt and equity for your next project, read Structuring and Raising Debt & Equity for Real Estate.
ROB BEARDSLEY Founder and Author Lone Star Capital
Rob founded Lone Star Capital in early 2018, a multifamily investment firm focused on acquiring and operating workforce housing throughout Texas and the Southeast. Since then, Rob has been involved in over $100MM of multifamily acquisitions and published the number one book on multifamily underwriting, The Definitive Guide to Underwriting Multifamily Acquisitions. He has written over 50 articles and hosts the Capital Spotlight podcast.
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