So, I just undid everything. Then, we’ll allocate these cash flows to the sponsor and the investor based on the agreed upon profit splits at this tier. The basic setup, though, is really the same. So, for the tier 1 IRR—I’m re-assembling all of these cash flows now—let’s link up to our repayment for the limited partners and then let’s link up to our repayment for the developers in tier 1. Question number five, are the operating assumptions realistic? So, maybe we can justify it and we can say that even if we go up to a 7% Cap Rate, the IRR doesn’t really fall by that much; it only falls by around 3% or so. So, starting with the limited partners, let’s go up and link to their initial equity contribution and then let’s do the same thing for the developers, and link to their initial equity contribution. Instead we simply take all remaining cash flow and allocate it according to the percentage splits at this tier. On the next line below, you can see our equity contributions at the beginning of the project total $1,000,000. In this table we are simply adding up the cash flows from each tier for both the investor and the sponsor. Because the IRR is less than 20%, it’s only 19% to us. As you can see, the calculated IRR for the entire project is 21.24%. We continue this process for all years in the holding period and once completed we can then move on to splitting up cash flows between the Investor and the Sponsor in this tier. Just like in Tier 2, all of the cash flow in years 1 through 4 is distributed in the prior tiers, which is why all the cash flows in Tier 3 are from the sale in Year 5. We could have just linked to total cash flow to equity investors as well and gotten the same result, it doesn’t really matter. We are going to take a look at the waterfall returns schedule in this part. That’s it for this case study. This becomes relevant if there isn’t enough cash flow to pay out the preferred return in any given year. So, if we did that, and we also increased the loan-to-value ratio to 60%, we’d still be in compliance with these ratios that we get very close to not being in compliance in fiscal 2023. We just replace these with zeroes. The general partner invests 10%, or $100,000, and the outside investor contributes the remaining 90%, or $900,000. We discussed some common components in equity waterfall models and emphasized the importance of reading the owner’s agreement in order to truly understand a waterfall structure. So, we’ll link to the ending debt balance at the end of fiscal 2018, and then we can use the XIRR function and we’ll enter all these as values, we’ll go up to the top and enter the dates right here. We’re also going to go through and answer the case study questions. Then we split these up 10%, 90% in this first tier and then anything that’s left over after the split can be distributed in tiers 2 and 3 below. So, it’s not as if we need to subtract just one of these, we’re subtracting everything in this repayment because that is what gets distributed in this tier. So, for this one, let’s just enter some extra spots to fill this in, the permanent loan issued will be an investment from our perspective as lenders and the financing fees will be something that we get from the company, so count that toward our returns year. You should now have an idea of how to combine everything we’ve learned in the first few case studies for office, retail, and industrial properties, for both acquisitions and new developments, and create this type of model and use it to answer case study questions. So, we should end up with $29.2 million at the very end. Since Tier 1 was calculated based on a 10% IRR, the Tier 2 15% IRR already includes the first 10%. This additional 10% is the “promote”. So, when you add up all those to a shorter time period, capitalized fees and interest, and the 1% loan fee, we get to an IRR that’s quite a bit higher than the interest rate here. All IRR hurdle calculations will be at the project level. So, it’s about $4 right here, then if we look at the other year it’s about $3.17. So far all of our assumptions are pretty straight forward and easy to understand. Equity waterfall models in commercial real estate projects are one of the most difficult concepts to understand in all of real estate finance.

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