When does the promote actually pay under an 8 percent compounding pref and a 70/30 split to a 15 percent IRR

Before you model anything further, find out when the promote gets measured. If the LP agreement permits a distribution of promote on "any capital event" including a refinancing, the sponsor can take carry off a refi proceeds distribution in year three on a mark the market later disagrees with. Then ask whether there is a clawback, and if there is, whether it is backed by escrow or by a personal obligation of an entity with no assets. Tender, does your Section 5 have either of those?

Warrant, on the language as excerpted, it has the bad version of both. Section 5.4 allows distributions in accordance with the waterfall upon "any Capital Event, including without limitation a refinancing or recapitalization," and the clawback language is one sentence saying the Manager "shall return" excess promote at final liquidation, with no escrow or holdback percentage and no guarantor named. On the co-invest point from rena-expert, the schedule says the Manager's capital contribution "may be satisfied in whole or in part by offset against the Acquisition Fee otherwise payable." So the $700k may never leave the building.

I'm stuck one level below this. Compounding on unreturned capital, does that mean the 8% is calculated on my $100 forever until capital comes back, or does the unpaid 8% itself start earning 8%? Those are two different documents to me and I've read both described as "8% compounding."

Meridian, it is worth about $970k on this deal. Take $14M at 8% simple for five years, which is $5.6M of accrued pref. Compound it so that unpaid pref also earns pref and you have 1.08^5, which is $20.57M total, meaning $6.57M of accrued pref. Same words on the cover, million dollar gap in the exhibit. Tender, also model the case where they distribute 5% current from year two. Pref accrual drops to roughly $3.9M, the hurdle balance falls to about $18M, and suddenly the 30% band is no longer fantasy. The whole promote depends on whether this thing cash flows early, which on a 5.0 going in cap with interest only debt depends entirely on where the coupon lands.

There is usually a third clause nobody quotes in these threads. Check whether the pref rate steps or the accrual stops on a defined event. Some agreements provide that accrued pref ceases to compound once the loan enters cash management, which sounds protective of the LP and is the opposite. Others step the rate down, for example from 9% to 7% after month 36 "upon stabilization as determined by the Manager." Determined by the Manager is doing a lot of work in that sentence. Tender, search your document for "cease to accrue."

Smaller rural syndications rarely carry a second hurdle at all. An 8% pref, then a straight 70/30 split. Reads cleaner than any of this.

The diligence I'd do here isn't in the document. Ask for the actual distribution statements from their last two full cycle deals and see whether any promote was taken at a refinance and what happened afterward. Ask what the guarantor's liquidity and net worth were at closing versus what the lender required, because a sponsor who is barely inside a liquidity covenant behaves differently in month 30 than one with room. And ask how many deals the same asset management team is currently carrying. A 1.5% fee on $14M of equity funds about one and a half people, so if they're running eleven deals on that basis somebody is asleep.

Run the top tier and the worry resolves itself. Getting the LPs to a 15% IRR with limited interim cash flow takes roughly $27M of LP proceeds, so call it $28M to $29M of total equity proceeds, which on a $26M loan means a sale in the mid $50Ms. Against $2.32M of NOI that is a cap rate in the low 4s. Nobody underwriting today reaches the 50/50 band on this deal, so the only economics worth negotiating are the 8 to 15 strip, and inside that strip the single biggest variable is whether current distributions credit against the pref. The position worth pushing for is a simple, non-compounding pref in exchange for a 25% promote above it. Cleaner for both sides.

Basic one from the side of the table I'm on: if the senior is floating, who buys the rate cap at renewal, and does that cost sit above the pref as a property expense or come out of the sponsor's pocket?

Plumb, in most of these it is a property level cost funded from operating cash or a reserve, which means it lands on the LPs before the pref, and if there is no reserve it becomes a capital call at whatever dilution the agreement allows. That dilution clause is the one to read next, Tender, because a punitive one combined with a promote on a refi and an unsecured clawback is a structure where the sponsor can be made whole on a deal the LPs lose money on. That risk cannot be priced from the LP agreement alone. The GP entity's own operating agreement is what shows who receives the promote and whether the person you trust is even the one holding it.