Case 009Real estate and infrastructureHard
A real estate fund and a developer put Rs 300 crore of equity into a housing project, 90:10, with a 12% preferred return and a 20% promote. The project makes Rs 180 crore. Work the waterfall and each party's return.
1The situation
Sunehri Residency is a 400-flat development on the edge of a southern city. A real estate fund and a local developer form a joint venture with Rs 300 crore of equity: the fund puts in 90%, Rs 270 crore, and the developer 10%, Rs 30 crore. The developer builds and sells; the fund provides most of the money.
The agreement pays out in order: first all capital back, pro rata; then a 12% a year preferred return on capital, compounded, pro rata; then 20% of everything left to the developer as a promote, with the remaining 80% split pro rata. Flats sell out and the project returns Rs 480 crore, a profit of Rs 180 crore, all received at the end of year 3. Treat the agreement as stated; real documents define the hurdle and compounding in detail.
2Your task
Run the waterfall tier by tier, give each party's cash, multiple and IRR, and explain what the promote is for.
Quick check
The developer put in 10% of the money. Roughly what share of the Rs 180 crore profit does it take home?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Of Rs 480 crore, the fund receives Rs 421.5 crore, 1.56x and a 16.0% IRR; the developer receives Rs 58.5 crore on Rs 30 crore, 1.95x and 25.0%. Capital comes back first, then the compounded preferred return of Rs 121.5 crore, then the developer takes a Rs 11.7 crore promote from the Rs 58.5 crore left. The fund gives up Rs 10.5 crore against a pro rata split, which is what it pays for a developer who only gets rich if the project beats 12% a year.
Step 1What are the three tiers, and how much goes through each?
Picture two friends who open a bakery: one puts in nine tenths of the money, the other one tenth and all the work. They agree the money comes back first, then a fair return on it, and only then does the baker get a bigger slice for the work. That is the waterfallThe ordered list of who gets paid what from the proceeds of a deal. Each tier must be filled before the next receives anything.. Tier 1 returns Rs 300 crore of capital, Rs 270 crore to the fund and Rs 30 crore to the developer. Tier 2 is the preferred return: 12% compounded for 3 years on Rs 300 crore is Rs 300 crore times (1.12 cubed less 1), Rs 121.5 crore, again split 90:10. That leaves Rs 180 less 121.5, Rs 58.5 crore, for tier 3.
| 300 | total equity in the joint venture, Rs crore |
| (1.12)^3 - 1 | three years of a 12% preferred return, compounded |
| 0.20 | the developer's promote share of profit above the hurdle |
Step 2What does each party end up with?
| Rs crore | Fund (90%) | Developer (10%) | Total |
|---|---|---|---|
| Tier 1: capital returned | 270 | 30 | 300 |
| Tier 2: preferred return, 90:10 | 109.3 | 12.1 | 121.5 |
| Tier 3: promote, 20% to developer | 0.0 | 11.7 | 11.7 |
| Tier 3: remaining 80%, 90:10 | 42.1 | 4.7 | 46.8 |
| Cash received | 421.5 | 58.5 | 480.0 |
| Multiple and IRR | 1.56x, 16.0% | 1.95x, 25.0% | 1.60x, 17.0% |
Check the total: Rs 421.5 crore plus Rs 58.5 crore is Rs 480 crore. The fund's profit is Rs 151.5 crore against Rs 162 crore on a plain 90:10 split, so the promote cost it Rs 10.5 crore, about 7% of the profit. Because all the cash arrives at year 3, each IRR is simply the multiple to the power of one third, less one; with distributions through the hold you would need the dated cash flows.
Step 3What is the promote for, and when does it bite?
The promote pays the developer for performance the fund cannot produce itself: approvals, construction, sales. Below the hurdle the developer earns only its 10%; above it, 28 paise of every extra rupee, because it takes the 20% promote plus 10% of the remaining 80%. At Rs 100 crore of profit, under the Rs 121.5 crore hurdle, the developer's profit is Rs 10.0 crore; at Rs 250 crore it is Rs 48.1 crore. The limit to note: a promote on a single project can push a developer to cut cost on finishes or push prices late in the sales cycle, which is why funds add a catch-up, a clawback across projects, or a second hurdle at a higher return.
Where candidates lose it
The usual loss is applying the 20% promote to the whole Rs 180 crore of profit. The preferred return comes first; the promote is 20% of what is left after it, Rs 11.7 crore here rather than Rs 36 crore.
The second miss is paying the preferred return as a simple 36% rather than compounded, or forgetting that the developer's own 10% also earns the pref. Both change the split, and an interviewer will ask which convention you used.
What the interviewer asks next
- Add a catch-up tier so the developer reaches 20% of total profit once the pref is paid. What does it receive?
- The project is delayed a year and still makes Rs 180 crore. Who bears the delay?
- How would a construction loan of Rs 500 crore sit relative to this waterfall?
Asked at Blackstone, Real Estate, Vancouver, 2025 (Wall Street Oasis): Mostly, real estate specific questions, with a few questions on debt + JV deals.
Company names and figures are illustrative.