Promoted interest workout. Here we're going to calculate the returns to the GPs, the LPs and on the overall deal. This is a real estate transaction where there is a preferred return and that is a pari passu return. So both preferred investments by the GP and the LP are treated the same until the preferred hurdle is met. So in this transaction, there's a purchase of a building for a 1,000,000, there's 60% debt funding, the GP is contributing 10% of the remaining financing, which is the equity, and the LP is contributing 90%. So what we'll do is we'll simply calculate sources of capital so we have that for our numbers below. The equity invested, therefore, is going to be equal to the purchase price minus the debt. The GP funding is going to be the 400,000, anchoring the row, times the 10% pro rata share. And the LP funding will be the inverse of that.

So the preferred hurdle rate is 8% and the promoted interest here is 30%. So that's going to be what the GP can claim of the LPs share post-hurdle. And again, in this situation, we're doing pari passu because that's the traditional way of doing it. More and more it is common for the preferred to be a true preferred and that would work slightly differently, but in the promote would still work the same which is what we're getting at here. So let's take a look at what the cash flows are going to be here for the overall deal. First, we're gonna look at what the preferred hurdle is and we'll calculate that for the preferred investment, it's going to be the opposite of the amount invested by the LP, which is 360,000 times one plus the hurdle.

And we're gonna raise that to the fifth year. And my years are actually numbers, they're just coded to look like years with text. And that gives us a preferred hurdle of 528,958.1. Now what we should really do is we should wrap this in a MIN because if this happened to be a deal that didn't return equity profits that could cover the preferred hurdle on a pari passu basis, they would only really be entitled to 95% of whatever that amount is. So what I'm going to do here is I'm gonna wrap this in a MIN and I'm gonna say minus MIN

just so that it's easier to build the MIN formula that way. Of that return, as a positive number or 90%. So in theory, this LP hurdle and the GP hurdle can never really be more than 90% and 10% of the proceeds paid. So if this were not as successful a deal and it returned less than the 8% hurdle, we would want to cap these payments at the pro rata amount times the proceeds. So what I'm gonna do here is I'm just gonna convert this to a MIN formula, and I'm gonna say equals minus MIN, and then I will keep this formula here as positive, and then I will apply the 90% pro rata invested amount to the actual proceeds. And what that's gonna do is it's going to cap this amount. So if, for example, the total proceeds, let's say, were 575,000, this would then be capped at 90% of the 575,000. And the GP, which we'll build in a minute, would be capped at 10% of the 575,000, and that just makes it more realistic. So now I'm going to build the GP hurdle amount and I will use the MIN formula for this. So equals minus MIN and then I'm gonna take the GP funding times one plus the hurdle, raised to the fifth year.

And then I will set that against and compare it to 10% of the proceeds, and that gets me 58,773.1 and now I can calculate my remaining profit of 562,268.8.

So in this particular transaction there are no annual distributions, just simply an entry investment and exit proceeds. So now let's take a look at the promoted interest. So there are different ways to run these waterfalls, they're heavily negotiated and there are different styles, American versus European. But one easy way to understand this is, again, when looking at the promote for the GP, the GP is going to get 10% of the LPs share of the remaining profits. So the first thing that we need to do is we need to get to that 90% of the remaining profits, we want to get the GPs contractual pro rata 10% out of the way. So I'm gonna take the profits as they stand and multiply them by 10%. And I will flip this to the negative. And that shows the 10% pro rata share of the profits that the GP is entitled to. Now what's left is the 90%, and the GP is going to claim 30% of that 90%. What we wanna do here is, first, take the profits remaining after the 10% for the GP has been taken out. So that is the SUM of the remaining profit and the 10%. And then we're gonna multiply that by the promote assumption of 30%. And now I need to flip this to make it a negative. And what we see here are the proceeds that are flowing to the GP because of the promote, that's 30% of the 90% that's left. And now what's left for the LP is the 70% of the 90%. And we can do that taking the inverse of the formula but we can also calculate it simply by taking the SUM of whatever's left in this transaction. So that's gonna be the SUM of the negative distributions in the original profit. And we also need to flip this to make it a negative. And what we should get here is remaining profits of zero.

So now we can take a look at the overall returns and see how the deal looks from a return metrics perspective. So the LPs cash flows are the initial investment of 360,000 shown as a negative. We have no annual distributions. And then we have for their returns at the end we need to take the SUM of the 70% of their pro rata share and the preferred hurdle and capital returned above of 528,958.1, and then we'll flip this to make it a positive. And for the GP, we'll take the 40,000 initial investment, there are no annual distributions, and then we'll take the opposite of the SUM of the promoted interest, the pro rata interest, and the preferred hurdle for the GP. And that gives us 118,812. And if we add these up, we'll get the total returns for the deal, which match our assumptions. So looking at the IRRs for each, lemme put my formulas out here first.

We'll simply run that formula for both the LP and the GP, as well as the overall deal. The multiple of money will be the exit proceeds for each investor group over the opposite of their investment. And that shows a healthy MoM. And then the splits will be the returns for the LP over the overall returns for the deal. And I'll anchor that so I can copy it down. And that shows about an 84% to roughly 16% for the GP.

The last thing I wanna do is just put my formulas out here to the right, although they are on the full version on the website.