Ensuring Accuracy in Cash Flow Distribution Communication for Your Next Multifamily Investment

If the property analyzer the sponsor is using is set up as a waterfall structure, but the sponsor is running a straight split through it, cash flow distributions will be off. This is the case on every property analyzer I've seen that tries to do this. Here's what I mean:

I learned this while building my own property analyzer.

Here you can see that the property analyzer is set up for a waterfall structure with tiers. However, the way the sponsor would be using this is a straight 70/30 profit split.

Where it goes wrong is that 100% of the cash flows are shown to be distributed to the limited partner investors and 0% goes to the general partners during the hold period. A straight 70/30 split would split both the cash flows from operations along with the profit splits upon sale. In this case, the advertised cash flow to limited partners would be higher than what would actually happen.

Where it's right is upon the sale, the total profits would be split up to match the 70/30 profit split. The total number matches what they're trying to communicate in the 70/30 split. It's just that the cash flow during the hold period isn't correctly represented.

Total profit is $6,604,120 as you can see in the bottom right corner of this screenshot (all cash flows and sale proceeds - initial investment of $5,828,131). If you look at the screen shot above it, the sponsor promote is $1,981,236.

$1,981,236 / $6,604,120 = 30%

Does it actually make a difference?

In the context of the total return upon the entire investment period, no. However, it will slightly affect IRR to limited partners because you'd be getting a little less profit sooner. This is because the straight split on the cash flow is applied when in the analyzer it shows that it's not.

What it also does is inflates the cash flow expectation to limited partners by 20-30% depending on the equity split. Even if the deal went exactly to plan, you would have overpromised the cash flow to investors.

Further:

I expect my property analyzer to be released by the time of this posting. You can get it on my website, UniteResidential.com