Multifamily equity waterfall and cash out refinance question
Modeling a multifamily development deal with a typical 8% pref, 70/30, 60/40, 50/50 IRR waterfall. I’m wondering how you handle a perm refinance during the hold period that would return some or all investor capital? 

Do you just pay the accumulated pref, then return capital (and stop the clock on the pref), and then wait until disposition to calculate any remaining proceeds split?
[{"id": "gw9a6hl", "text": "Here for the answer", "replies": [], "depth": 1}, {"id": "gw9chc1", "text": "Why would you stop the clock on the pref if you haven\u2019t paid it 100% back?", "replies": [{"id": "gw9dt54", "text": "Sorry, that was assuming you paid back all investor capital.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gw9egw4", "text": "Read the JV agreement. Model what is in the document.", "replies": [{"id": "gw9t6dp", "text": "We are writing the agreement so that\u2019s mostly up to us. I am interested in seeing how others have modeled these scenarios.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gw9mlvh", "text": "Hi, I work at a real estate PE firm that is typically the LP investor in development deals, and my previous job was at a real estate PE firm that operated as the GP in multifamily deals. \n\nLet me know if I\u2019m not understanding your question correctly, but assuming the refi on the development deal is happening at stabilization (when refi\u2019s would typically happen), there would presumably be cash flows from operations to distribute between the refi and disposition. \n\nHonestly though, regardless of whether or not this is the case, a refi would not fundamentally change the waterfall mechanics. Regardless of when the cash flows come in and how big they are, you still have to follow the waterfall that is in place. So for example, if the refi satisfied most of the pref and return of capital, the next distributions (regardless of whether they\u2019re from operations, disposition, etc and whether they come in between refi and dispo or just dispo) would first go toward finishing off the pref or return of capital (depending on the order they\u2019re occurring in). After that is satisfied, the distributions would go toward meeting the next IRR hurdle and would follow the splits laid out in the waterfall (in this scenario, it would be 70% to LP and 30% to GP until the LP hits a X% IRR).\n\nI have seen/worked on deals before where there were terms stipulating that there would be a specific sub-structure if a major capital event happened, but in my experience that is definitely the exception and not the norm. I am not sure what this is for, but unless stated otherwise in the JV agreement, equity term sheet, PPM, LPA, etc, I would assume that you follow the written waterfall regardless of the catalyst for the distributions is. \n\nHope this helps!", "replies": [{"id": "gw9t1m1", "text": "This is exactly what I was looking for. Thanks for the detailed explanation.", "replies": [], "depth": 2}, {"id": "gwaazv2", "text": "Great response.", "replies": [], "depth": 2}, {"id": "gwaebrg", "text": "This is the answer.\n\nAlso I have questions for you if you\u2019d take a PM.", "replies": [], "depth": 2}, {"id": "gwi3phx", "text": "&gt;animalcrossingOG1994\n\nI'm interested in this as well. For new developments, whats the pref split you and waterfall you are seeing? \n\nLast pitch we got was LP 8.5% pref, then 70% up to 14% IRR, then 55% above that. For a new development deal, the promote feels very rich given how much more risk is involved.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gwaaoux", "text": "Look into equity crystallization.\n\n[Link to Adventures in CRE explanation](https://www.adventuresincre.com/glossary/partnership-crystallization/)", "replies": [{"id": "gwd5wpw", "text": "Fuck that there are very very few firms that are in a position of such negotiating strength that they can crystallize their promote. I\u2019ve seen the ask twice this cycle and it\u2019s laughable for a GP to request it.", "replies": [{"id": "gwd9pgg", "text": "Fair enough.  It\u2019s still an interesting way to approach the promote", "replies": [{"id": "gwda9oz", "text": "It is but I\u2019ve only seen it once in a super long term JV with a REIT that allowed for crystallization at certain time milestones but also has a claw back provision. The GP was a super niche operator so it was kind of like their way or the highway.", "replies": [], "depth": 4}], "depth": 3}, {"id": "gwe4wa7", "text": "I don\u2019t know if it\u2019s as rare as you think. We\u2019ve done it several times with a REIT, a large PE shop, and probably half of our regular deals with family offices.", "replies": [{"id": "gwerp7t", "text": "Is it long term programmatic equity in a niche sector", "replies": [{"id": "gwf6cwu", "text": "Asset by asset jv in multi haha", "replies": [{"id": "gwfee81", "text": "Hey nice deal if you can get it.... I\u2019d never let that fly in my fund unless it was a JV with like the only guy who could get you into some super niche sector in some super niche location that\u2019s absolutely on \ud83d\udd25", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]