GP Catch Up Clauses in Private Equity Real Estate Explained

GP Catch Up Clauses in Private Equity Real Estate Explained // If you've worked in real estate private equity, especially if you've worked for a real estate private equity fund, you've likely heard the catch up waterfall structure discussed or used in a real estate partnership structure. But what is the GP catch up clause in private equity real estate, and how is it used? That's what we're going to cover in this video.
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[@BreakIntoCRE]

Any other waterfall structures you want to see a video on? Let me know in the comments. Thanks for watching!

[@Maersk99266]

Break Into CRE is the new waterfall structure course / models only for comercial real estate or does it include fix and flip and buy, build and sell scenarios? Thanks

[@BreakIntoCRE]

@@Maersk99266 the waterfall structures we build in the course are mostly used for commercial, but they could also be applied to short-term flips and build and sell scenarios. As long as you have the cash flows and dates associated with those cash flows, you can apply what you learn in the course to split profits between GP and LP.

[@Maersk99266]

Break Into CRE thanks!

[@jac243]

I like that you keep it short and sweet to the point that keeps me interested

[@anthonyrobertaziz]

New to this channel and many of these concepts (from a different field, kind of) and after having seen comparable videos on other channels, I have to say that your explanations are very clear, fairly succinct and easily digestible. Keep up the great content - love it!

[@BreakIntoCRE]

Great to hear, Anthony! Thanks for watching!

[@chiewsaetern6473]

I’m just started providing financing for CRE and other types of deals and your channels has really helped me understand the financial lingo!!! Thanks!!!

[@marinawong9662]

Having invested in syndication deals for a few years and looked at many discounted cash flow models, I have to say your video is one of the most detailed one though I would prefer to see some actual numbers in these videos. I am learning some jargons in co-GP deals and came across this video. Will definitely look thru your other videos to see what you have. Thank you.

[@nikolaidoinikov7939]

Thanks for this explanation! Will use this notion to crack the CAIA exam soon.

[@TimJDiesel]

Great job Justin!

[@BreakIntoCRE]

Thanks for watching, Tim!

[@dilsaj4200]

Will you launch content on private equity (not only real estate)?

[@dilsaj4200]

So helpful, thank you. Great content

[@gritequity2132]

Great video. Keep it up, sir!

[@eduardomagana7250]

Great video.

[@BreakIntoCRE]

Thanks for watching, Eduardo!

[@unguyenvan9721]

You try to give the video more brightness it will be great if you do

[@shashankc.r7947]

In pyramid top cashflows are split 80:20 how is it derived on what basis please explain

[@marinawong9662]

In your example of 8% pref, since the GP has invested 10% of the total equity, is this 10% of equity treated like any LP investment? In another word, this 10% earns exactly what the 90% would earn and is not part of the GP economics. Once the pref is achieved (by both the 90% LP capital AND the 10% GP capital) and there is the 50/50 split, the GP is really getting 10% of the LP economics (since it represents 10% of the total capital), which is 5% of the entire capital undergoing the 50/50 split, plus the GP economics, which is half of the capital being split, resulting in 55% of the capital being split. Is this calculation correct?

[@penwille781]

Are clawbacks and catchups the same thing?

[@balrajvishnu]

Is hurdle rate and preffered return the same ??

[@illuminated2438]

It can be. A preferred return is a hurdle rate if above it the GP receives promoted interest. But you can have multiple hurdle rates over which the cash flows are split differently. For example over an 8% preferred return the GP may receive a higher portion of the proceeds, but over another IRR, such as 12% for example, the GP may receive even more. In that case 12% is a hurdle rate but not a preferred return.

[@guyhakim]

Hey, what do u mean "the overall cash flow" ? it's the overall net cashflow from rent ? what about sale ? thanks

[@BreakIntoCRE]

Yup, the overall cash flow I'm referring to includes everything - rent, operating expenses, capital expenses, debt service, and net sale proceeds.

[@Mr.Moneybags40]

so it is accurate to think the catch up is like the gp falling behind in profit for himself , and the catch up is him "catching up" on the profit level???....

[@shaimosc6051]

Have you ever seen a waterfall structure where the GP/LP start to split cash flow disproportionately after the pref, BEFORE either party gets their original investment back ? Under that scenario, what happens if the property cash flows well during a 5 year hold, but then tanks on a sale. Does the GP pay back some/all of the disproportionate cash flows that he took in years leading up to the sale ?

[@marinawong9662]

That would be dictated by the PPM.

[@shaimosc6051]

@@marinawong9662 of course, but how do you model it ?

[@cc123456789]

Will there typically be anything going into the cash reserve? for maintenance, emergency fund etc? Also are most of these structures you see on a personal basis typically financed 100% privately or are there some form of bank financing involved?

[@marinawong9662]

In a syndication scenario, there would be bank financing. And yes for cash reserve but that has nothing to do with the cash distribution to LPs. It would be modeled in the discounted cash flow model that the syndicators usually would show to the investors.

[@cc123456789]

@@marinawong9662 thank you.

[@123pammi]

how would you model a 2-layered catchup? meaning if 8% pref, 20% catchup; 12% pref, 30% catchup? Thank you!

[@marinawong9662]

Interesting. I have never seen something complicated like this. Does that mean there are 2 classes of investors or does that mean 8% during hold period and then 12% during capital event?

[@123pammi]

@@marinawong9662 Hi Marina - same investor, basically incentivizing sponsor to reach a higher hurdle. Challenge was to model the scenario where the returns are between 8-12%. I was able to figure out the model - happy to share if of interest

[@marinawong9662]

@@123pammi I am more interested in knowing such a sponsor if he/she is in the US.