In the first part of this 3 part series I wrote about the basics of partnerships and some of the key elements investors must consider . One of the selling points to potential investors is the structure of the proposed deal. In this post I’m going to walk through some of the most common partnership structures and show how each is modeled. Before I do, however, I want to define a few critical terms that are often misused.
Pro Rata – Proportionately (if you put in 10% of the equity, you receive 10% of the proceeds)
Pari Passu – Equal Progress; Without Precedence (you get your money at the same time as the investors get theirs)
Preference “Pref” – Stated Rate of Return or Coupon on Invested Capital. Between or among Classes of Investors at any level (investors often receive a pref for putting up a disproportionate amount of capital).
Priority – Order of Distributions of Cash or Allocations of Tax Attributes. Often Called “Waterfall”
Promote – Sweat Equity Share to Promoter (Sponsor) (sponsor often receives a promote for his work and expertise in the deal)
There are many ways for you as the sponsor to structure a partnership, each with varying degrees of complexities. There is no such thing as a “standard deal.” There are 3 basic structures that I want to cover; pref plus a split of the cashflows (Country Club), IRR lookbacks (Wall Street), and catchups and clawbacks.
Country Club – This model contains a preferred return and 2 tiers of cashflow distribution.
Country Club
Wall Street – This model utilizes IRR Lookbacks.
Wall Street
Catchups and Clawbacks – There are 2 tabs here.
Catchups/Clawbacks
The best way to learn about these partnership structures is to play around with each of the models. Think about how they’re structured and the benefits to both the investors and the sponsor or each structure. When you’re doing your first deal, how you structure the partnership is critically important.
Post any questions in the comment section below.
Similar Posts:
- Partnership Series (Part 1 of 3)
- Builders Corner: Negative Leverage
- IRR Miscalculations Waste Time and Money
{ 12 comments }
Joe, good series on partnerships. Is there a way (or version) to view the formulas of the models?
I enjoy reading the blog, keep it up.
Hey Zach, thanks for the comment. I'll email you the document with the
formulas. I apologize, I had issues uploading the excel sheets.
Thanks for reading.
Joe,
Also impressed with your partnership breakdown. Can you send me the excel files with formulas as well?
Thanks.
Thanks for your comment. I'll email it over to you right away.
Joe,
Can't wait for Part 3, we put you up on our blogroll for Monday, as this is a series of posts our readership would love! http://bayareacomre.wordpress.com/2010/03/22/ar...
Justin and Jon, thanks for passing along this post. Part 3 is in the works, hopefully I'll have it up next week. Is there anything in particular you guys thing should be included?
Joe, really enjoy your blog. I've been following for close to a year now. Great job! Would you mind also emailing me the excel files? Keep up the good work.
Thanks for your comment, I've emailed you the excel file. Thanks for
reading!
Hey Joe,
Could you email me those partnership models with the formulas, too? Thanks for posting those. They help a lot.
I also noticed Josh Kahr gives a brief discussion of those similar models in his Lecture 7 of the real estate finance course on iTunes if anyone is interested.
Thanks.
Hey Joe,
Could you email me those partnership models with the formulas, too? Thanks for posting those. They help a lot.
I also noticed Josh Kahr gives a brief discussion of those similar models in his Lecture 7 of the real estate finance course on iTunes if anyone is interested.
Thanks.
Joe, great posts, really enjoy your blog. Is part 3 up? Could you send the xls? Thanks.
Hey Giovanni, thanks for the comment. Sadly, I have yet to write a part 3, it's long overdue. I'm just not sure what to write about at this point. Any ideas?
I'll email you the spreadsheets. Thanks for reading!
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