Identify the distribution order
Read the agreement for the order of capital returns, any preferred return, catch-up provisions and subsequent profit-sharing tiers. Identify the cash flows included in each test and the dates on which they occur.
Model the defined hurdles
Some tiers depend on an internal rate of return, others on a cash multiple or another measure. Use the agreement’s definitions. There is no single set of percentages that applies to every ownership arrangement.
Check the model
Test a loss, a low-return case, a distribution at each hurdle and a higher-return case. Confirm that distributions sum to available cash and that each party’s contribution and receipt is recorded once.
Account for the loan
Model debt service, required reserves and distribution restrictions before owner distributions. Use the result to assess the property and financing; a modeled return is not a promised investment outcome.
Translate the agreement into a model you can check
Begin with the order of distributions, the balances on which returns accrue and the conditions for moving between tiers. A return of capital, an accrued preferred return and a residual profit split are different calculations. Treat them as separate schedules so the model shows where each dollar goes.
Test a low-cash-flow outcome, an early sale and a longer hold. Check whether each case reaches the same tiers and how earlier distributions affect later allocations. The objective is to explain the economics of an existing or proposed ownership arrangement to the sponsor and its advisers; MCM does not arrange investor commitments.
What the sponsor should receive
A usable model should show the inputs, the calculation for each tier, the distributions to each existing ownership interest and a reconciliation to total available cash. Include a plain-language explanation of the assumptions and the questions that require clarification from transaction counsel.
Discuss your property financing or explore sponsor consulting.