8% compounding pref then 70/30 to a 15% IRR, when does that promote ever pay

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 that the market later disagrees with. Then ask whether there's a clawback, and if there is, whether it's backed by escrow or by a personal obligation of an entity with no assets. Tender, does your Section 5 have either of those?

Warrant, 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. No escrow, no holdback percentage, no guarantor named.

And to 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's worth about $970k on this deal. $14M at 8% simple for five years is $5.6M of accrued pref. $14M compounded so that unpaid pref also earns pref is 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, I'd 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 isn't 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's usually a third clause nobody quotes in these threads. Check whether the pref rate steps or the accrual stops on a defined event. I've read agreements where accrued pref ceases to compound once the loan enters cash management, which sounds protective of the LP and is the opposite, and one where the pref rate dropped 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."

Nothing I look at rural has a second hurdle at all. 8% pref, straight 70/30, done. 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 you'll stop worrying about it. To get LPs to a 15% IRR with limited interim cash flow you need 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. At $2.32M of NOI that's a low 4s cap. Nobody underwriting today is getting to the 50/50 band on this deal, so the only economics anyone should negotiate is the 8 to 15 strip, and inside that strip the single biggest variable is whether current distributions credit against pref. I'd push for the pref to be simple and non-compounding in exchange for giving them 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's a property level cost funded from operating cash or a reserve, which means it lands on the LPs before the pref, and if there's no reserve it becomes a capital call at whatever dilution the agreement allows. That dilution clause is the one I'd read next, Tender, because a punitive one plus promote on a refi with an unsecured clawback is a structure where the sponsor can be made whole on a deal the LPs lose money on. I don't think you can price that risk from the LP agreement alone. You'd need the GP entity's own operating agreement to see who receives the promote and whether the person you trust is even the one holding it.