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Back-of-the-napkin commercial real estate underwriting, in seconds.
5 Second Model · back-of-the-napkin underwriting
Equity Waterfall
Whose money, whose promote. How a deal's profit actually splits between LP and sponsor.
The distance between a deal’s IRR and the limited partner’s IRR is what the sponsor’s promote costs the investor. This model runs a cumulative preferred return on unreturned capital, returns capital, applies an optional catch-up and splits the residual with a promote. It reports LP and sponsor returns separately, the dollars of promote earned, and the sponsor’s share of total profit.
Statement of assumptions & returnsAll figures USD · annual unless noted · click any number to type it exactly
LP net IRR / Sponsor IRR
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Where each dollar of profit lands
The capital
| Total equity | -- |
| Limited partner contribution | -- |
| Sponsor co-investment | -- |
| Total distributions over the hold | -- |
| Total profit | -- |
The split
| Return of capital to LP | -- |
| Preferred return paid | -- |
| Unpaid preferred still accrued | -- |
| Split above the pref | -- |
| To the limited partner | -- |
| To the sponsor | -- |
| Sponsor promote earned | -- |
| Sponsor share of profit | -- |
What each side earns
| LP equity multiple | -- |
| LP IRR | -- |
| Sponsor equity multiple | -- |
| Sponsor IRR on co-invest plus promote | -- |
| Deal-level IRR before the split | -- |
How to read the gap. The distance between the deal-level IRR and the LP IRR is what the sponsor's promote costs the investor. A 3-4 point gap on a strong deal is normal and is what pays a sponsor to find and run it. A large gap on a mediocre deal means the structure, not the real estate, is doing the earning.
Modeled here: a cumulative, non-compounding preferred return, return of capital, then a straight promote split above the pref. Real agreements add catch-up provisions, IRR-based tier hurdles, clawbacks, fees paid to the sponsor before any of this runs, and different treatment of operating cash versus sale proceeds. Sponsor fees — acquisition, asset management, disposition — usually matter more than the promote and are not modeled. Read the operating agreement.
Common questions
- What is a typical promote structure?
- An 8% preferred return with a 20% promote above it is the market default for a single-tier deal. Institutional structures add IRR-based tiers, catch-ups and clawbacks.
- How big should the gap between deal IRR and LP IRR be?
- Three to four points on a strong deal is normal and is what pays a sponsor to find and run it. A large gap on a mediocre deal means the structure, not the real estate, is doing the earning.
- What matters more than the promote?
- Sponsor fees, usually. Acquisition, asset management and disposition fees are paid before any of this runs and often exceed the promote. Read the operating agreement.