Preferred Return Question

[Jeff D.]

Hi all,

Been looking at typical syndication structures and have seen a common one is to offer an 8% preferred return and then 70/30 the cash flow above that between GP/LP's.

My question is, what is the 8% preferred return based off of? 8% preferred return on the original equity contribution? 

What's the difference between a preferred return and an IRR hurdle? Besides the fact that they're two different metrics, don't they basically serve the same purpose, to establish a threshold to be met before a promote incentive can kick in?

Thanks for clarifying!

[Todd Dexheimer]

To add on to what Nick said, preferred is the amount the investor is paid prior to the GP getting paid. If the pref is 6% and you invested $100,000, then you would make $6,000/year, then after you make that the remaining profit is split 70/30. 

A hurdle rate or waterfall, is based on a refi or sale. When the investor gets paid a certain amount, the split then goes down to a new rate. For instance. An example would be a 70/30 split with a 15% IRR hurdle, then 50/50 split thereafter. This is a way to award/motivate the sponsor for solid performance.