Do profits from Refi benefit GP directly?

[Vlad Denisov]

We have 8% pref and plan to refinance into GSE on year 3. We return 50% of the capital to investors. Do we split this payout like any other cashflow? 

Let's say we have a cumulative 70/30 split. Let's say year 3 brings us a total of 55% (income+refi). If we had 2% return in the year 1 and 4% return in the year 2, does it mean that we have to give investors in year 3:

a) 8-2= 6% - difference they didn't get in year 1

b)8-4=  4% - difference they didn't get in year 2

c) 8% - for the year 3

Thus, 55-(6+4+8) = 37%

And from these 37% we as GP get our 30% split? So, 37*0,3=11.1%

Is it correct?

[Brian Burke]

@Vlad Denisov if this is a live deal you have to follow the waterfall sequence as written in your operating agreement. There are several different ways the cash flow can move in this scenario, but only one way in your operating agreement. You have to do exactly what it says or you are in violation of the agreement and you open yourself up to bad customer relations at best, a lawsuit at worst. 

But generally it works like this:  The investors get 100% of the proceeds until all accrued pref is caught up. As you go you should be accruing the pref to the investor capital account and deducting distributions, so you should know how much pref has accrued at all times. 

Next, the investors would get 100% of the distribution until they have received all of their capital back. 

Next, if there are proceeds left the sponsor gets a split of the excess portion. 

This structure is most common but could differ if your agreement is written differently.