Real Estate Investing Equity Waterfall workout. If we go to the workout tab, we're being asked to calculate the returns to the GPs, the LPs, and on the overall deal. We have some deal terms here, the purchase price, percentage of debt funding, and the breakdown of the equity investment between the GP and the LP. First thing we have to do is calculate the debt funding in dollars, which is 60% times the purchase price of the building. The equity price is going to be the difference. The GP funding is going to be equal to the 10% times the amount of the equity invested, and the LP funding will be the 90% times the equity invested. The first thing we need to do is calculate the preferred return. This is the hurdle rate that has been offered to the LPs for the initial invested capital. This will be shared between the GPs and the LPs on a pro rata basis. So the initial LP investment is equal to the opposite of their investment. And we do this for cash flow purposes. This is a cash out at this point, and the GP investment will be the 40%. There are no cash flows returned to the GPs or the LPs in between investing and selling the building in year five. In year five, the building is sold for equity profits of 750,000. This is after all the debt has been repaid. So the return to the LP is going to be equal to their initial investment. And I'm flipping that sign. Times one plus the hurdle rate, and I'm gonna raise it to the five. And I've coded my years as numbers, so we can use them as the actual exponents. And that same calculation, once I absolute reference my yield and my year, I can copy down to the GP investment. So in terms of the overall returns on the deal. If at this point the IRR is going to be equal to effectively the preferred hurdle rate, because that is what has been returned to the investors, the profits to be shared above the hurdle is going to be equal to the 750,000 of pure equity profits, less the amount returned to the capital investors. Now we need to deal with the promoted interest, and here is where the GPs return will increase. In addition to the 10% stake that they have, which is their pro rata stake in the profits of the deal, they are gonna get 30% of the LPs 90%. That then leaves 70% of the 90% for the LP. So the easiest way to do this is actually to calculate the GPs pro rata share first, which is gonna be equal to the 10% times the profits remaining.

And now what's left is the 90%. And that's gonna be- And that's going to be the amount that the GP gets to take 30% of. The remaining profits, which are the 70% of that 90%, simply fall to the LP. And if we add those up, we should get the same amount of profits that we had started with. Now we need to calculate the overall returns for the deal. So once again, the initial investments will serve as our inflows. There are no cash flows in between. And now the total LP cash flows will be the original capital returned, plus the 8% hurdle, plus the 70% of the 90% stake. For the GP, it's going to be their original capital returned plus the 8%, plus the 10% pro rata stake, plus the promoted interest. 30% of the LPs 90% stake. And if we add these up, they should match the amount of equity profits at sale. Now in terms of the returns if we look at the LPs IRR, they come in at 11.9%. Copying that down, we see that the GP returned 24.3%, and the overall IRR on the deal was 13.4%.