case study
i'm working on a case study for an interview and i was curious if someone could help clarify something for me. the case is a joint venture between two development entities (OC and TC) and a limited investor partner (LP). the LP is supplying 100% of the equity forthe project. However, it later talks about the LP receiving an 8% preferred return and subsequently OC and TC get an 8% catch up return. Then there is a promote with an 80/20 split in profits with the (OC/TC) splitting the 20% promote. It says "assume OC and TC put in 10% of the required equity". Maybe I'm unfamiliar with how promotes work but it said the LP supplied 100% of the equity for the project. What is the 10% required equity that is referring to? Hopefully this is readable. 
[{"id": "eicnavu", "text": "Hey!\n\n&amp;#x200B;\n\nHappy to help but do you have a screenshot (you can inbox me) of the assessment? At face value it doesn't make much sense to me either. Eitherway, best of luck with your interview ahead!!!", "replies": [], "depth": 1}, {"id": "eicov0v", "text": "Is this an equity waterfall case study? ", "replies": [{"id": "eicrgck", "text": "Yes there is an equity waterfall ", "replies": [], "depth": 2}], "depth": 1}, {"id": "eicqar1", "text": "What they might mean is that one LP is providing all of the \"LP equity\" with the TC and OC proving a \"co-invest\" of 10% of the \"GP/sponsor equity.\" So in reality the LP.is providing 90% and the GP (TC and OC) are providing 10%.\n\nWithout seeing the actual wording or JV/operating agreement it's hard to say but the LP group might be receiving their prefered return in a position before the GP group receives their 8%. Once everyone's equity is caught up then the 80/20 waterfall comes into effect.\n\nI agree the wording is confusing but maybe that's what they mean? \n\nI work in multifamily and it's pretty common to separate the LP and GP equity on an OM even if they are treated pari pasaou. ", "replies": [], "depth": 1}, {"id": "eiculg5", "text": "If it\u2019s a Harvard business school case study I can send you my solution, this all seems wildly familiar . ", "replies": [{"id": "eicutaa", "text": "It\u2019s for a full time position but I wouldn\u2019t mind that either. Can I dm you my email possibly?", "replies": [], "depth": 2}], "depth": 1}, {"id": "eicv6h7", "text": "Yes! ", "replies": [], "depth": 1}, {"id": "eida1r2", "text": "I've been general partner in two similar deals, starting from scratch with lots of people who didn't know what they were doing in terms of creating a private equity structure.  \n\nI understand the preferred return concept.\n\nWhen people say \"Promote\" is that everything over the Preferred Return?  \n\nAre waterfall and promote the same thing?  ", "replies": [{"id": "eidcos3", "text": "Hi!\n\n&amp;#x200B;\n\nThe waterfall is a way of distributing the cashflow from a project based on hurdles to the parties that are to be benefiting from it!\n\n&amp;#x200B;\n\n So...  you would use the waterfall method to model the promote structure in a project which are based on a number of hurdles. In this case the 8% preferred is the first hurdle, then the remaining cash would fall into the 8% catch up return, and then you would go into the 80/20 promote to the developers, etc...!\n\n&amp;#x200B;\n\nHope that makes a bit of sense!!\n\n&amp;#x200B;\n\n&amp;#x200B;", "replies": [{"id": "eidd813", "text": "So the waterfall is everything - the preferred return and the promote?  In this case the 8% and the 80/20% split?\n\nThe promote is how you split everything after the preferred return, meaning the 80/20% in this case?  \n\n&amp;#x200B;\n\nMy last deal was 10% preferred return and then 60% investors/40% GP (me).  The people I work with are very experience real estate people, but we usually don't work in this structure so it's just been a struggle of learning the language as we deal with the outside world.   So to change this up - the waterfall for my deal was 10% preferred and 60/40% promote.?  Did I say that right?  ", "replies": [{"id": "eide5wn", "text": "Sounds right to me!\n\n&amp;#x200B;\n\nThink about it like 1 big cup (your cashflow) filling up a lot of tiny cups  1 after the other in order of importance (the structure).  The last cup (the final hurdle) will take all that's left over from the big cup!\n\n&amp;#x200B;\n\nSometimes there isn't enough in the cashflow cup to fill up all the tiny cups so you won't always meet your hurdle rates, they're there in case a development goes super well to reward the developer for performing!\n\n&amp;#x200B;\n\nSo in your case:\n\n\\- The cashflow would first be prioritised towards whoever has the preferred return, when they have reached that hurdle based on the cashflow from the project the residue of the cashflow will fall into the next hurdle (the promote structure)\n\n\\- The next hurdle will be the subordinate party's cashflow!\n\n\\- All of the residue post-preferred return and capital return will be split 60%/40%, so in this case this is your final cup!!\n\n&amp;#x200B;\n\n\\- If your project didn't go so well there might not be any going into the last cup but instead all will be put forward to pay off that 10% pref return.\n\n&amp;#x200B;\n\nI know this is a really weird way of explaining but I couldn't think of anything better.\n\n&amp;#x200B;\n\nEdit: added another cup...", "replies": [{"id": "eidehhw", "text": "Thank you.  Makes total sense.  \n\nBasically I don't get paid unless I make more than 10%.  In this case that's the final cup, I'm the last cup to be filled.  Of course I knew that but I struggle when working with people who do this all the time.  I used to do it with all internal money so didn't have to deal with all this!  Just different. ", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]