On a 152 unit value-add deal, a longer hold raises the promote and lowers the LP's annual return

A year 7 case isn't a hold decision, it's a refinance decision, so underwrite the refinance at today's picture rather than the pro forma. Sizing an agency takeout in month 30 means the lender looks at trailing three months annualized, not stabilized NOI. If $1.42M in NOI shows up in month 34 instead of month 30, the refinance is effectively pricing off maybe $1.28M and the proceeds gap has to get funded by somebody, usually the LPs through a call. Price the extension properly too. Extension options typically strike a new rate cap at the then-forward curve, and that cost isn't small on a $13-14M loan. Get the lender to put the extension conditions and the cap requirement in writing before anything is signed, because those tests are where first-time sponsors discover they don't actually control the hold period at all.

The part worth explaining plainly: in the year 7 case the LPs get less per year while the sponsor's total take goes up. That doesn't make it wrong, the promote sits above a 13 percent hurdle either way. But someone will ask it in exactly those words on a webinar and the answer needs to be a sentence, not a spreadsheet. How do sponsors usually handle that? Is there a version where the hurdle steps up over time so a longer hold costs the sponsor something too?

@chriswalton8 that's the step-up hurdle, some deals move the pref from 8 to 9 in year 5 or 6 exactly to stop the GP sitting on the asset. I've seen it maybe twice in a dozen decks.

@dpatel_re as an LP I'd take the 13.4 at year 5 over the 12.1 at year 7 without much thought, because the year 7 number depends on a refi that hasn't happened and a cap rate two years further out. The multiple doesn't tempt me. My money isn't idle if you give it back.

And I'd rather you write 5 with disclosed extension rights than write 7 to look conservative. Tell me the shape you actually intend. If you say five and hold seven with a good reason, I'll listen. If you say seven up front, half your allocation goes to someone else's deal.

Some of these numbers need a harder look before anyone argues about hold periods. What's the going-in cap? $18.2M on 152 units is $120k a door, so at a 5.5 exit you'd want in-place NOI around $1.0M today to make the entry pencil at anything like a 5.5 to 5.75. Buying at a 5.2 and exiting at a 5.5 is already conservative, fine. Buying at 4.9 isn't conservative anywhere in that model. NOI going $1.42M to $1.56M is 4.8% a year, two years after capex is done and units are all turned. That's a rent growth assumption, not an operations assumption. Cut it to 3% and year 7 gross comes to $27.8M, the promote drops maybe $180k, and the LP IRR falls under 12. 2% cost of sale is thin. Broker plus title plus whatever the state charges on transfer, and transfer tax varies a lot by state, so check the local rate. 2.5 to 3 is a safer planning number. Last thing worth pinning down: is the 13.4% net of the asset management fee and the acquisition fee, or gross? People fudge that line constantly and it moves the whole comparison.

Read the extension language out loud before the raise. The two 12-month options in most bridge documents aren't options, they're requests with tests attached, and one of the tests is often a debt yield that a capex plan temporarily wrecks while units sit vacant. Miss it in month 34 and the sale happens in a window that wasn't chosen. On crystallization: the mechanic is that the asset is valued at refi, the promote is computed as if it sold, and it's paid out of refi proceeds. Two things follow. A valuation method needs to be spelled out, appraisal rather than GP estimate, and a clawback needs real teeth, because a promote taken in year 4 can turn out to have been unearned at the year 7 sale. If the clawback is unsecured and the money has been spent, it's a sentence in a document and nothing else. @hannah_west29's point about net versus gross is the one to fix first. If the 13.4 is before the 1.5 or 2 percent asset management fee, investors will recompute it themselves, and the difference reads as a misrepresentation even when it was sloppiness.

If the concern is looking grabby, the structural answer is a European waterfall on the refi only. All refi proceeds go back to LPs until they've had capital plus accrued pref, then the split starts. The sponsor gets paid at refi, but only after LPs are whole, and nobody can accuse them of taking promote off borrowed money. The other thing to write down now is who signs the loan and what they get for it. If the sponsor's name is on the recourse carve-outs and the completion guaranty, that's a real exposure and it's worth naming in the offering, partly because it explains exactly why the promote exists. Deals exist where the guarantor got a separate fee disclosed in one line that nobody objected to. Securities counsel in the relevant state has to draft the hold-period language and the fee disclosures anyway, so bring them the 5-with-extensions version and the 7 version and see which one they can describe without three pages of caveats.