Preferred return is the percentage of [[Internal rate of return (IRR)|IRR]] that is returned to LPs. *This is a type of "waterfall" or a "hurdle"*. After the preferred return, cash flows are divided between GPs and LPs. The percentage of these flows to the LP is called the *promote*. It's possible to have multiple hurdles and promotes. For example, a second hurdle at 18% IRR could have a promote of 50%. This would apply in an upside scenario. In San Francisco, I've seen [8 and 50](https://docs.google.com/spreadsheets/d/1c4gu0IVGElT2XDLkp77n83jFbyktzJNc/edit?usp=sharing&ouid=109306232101260716363&rtpof=true&sd=true) and [6 and 20](https://drive.google.com/file/d/1MPDg7NrrvPnePch5f8OiJ5yM_gkvjUYI/view). From investors outside of SF, I've heard of 8 and 20. See also: - [[Real estate investing]] - [[Promotes are incompatible with indefinite hold periods]]. - [[Cash flow life cycle]] explains when distributions are realized. A complex fee structure example from [this memo](https://drive.google.com/file/d/1MPDg7NrrvPnePch5f8OiJ5yM_gkvjUYI/view): - There is one waterfall at the property level. Here there is a fund waterfall (with its own fees, typically a 2% management fee plus a 20% carried interest or profit share) as well as a property level waterfall (with its own fees and carried interest). - Waterfall structure: After a 6.0% IRR or annual return is met, net profits are split 80% to investors and 20% to the operators (Cypress/RCP). The investors will receive their 6.0% annual return plus the return of capital prior to the operators receiving any profits. After an 18% IRR is met (an upside scenario), then profits are split 50%/50% between the investors and the operators. - Asset management fee: 1.75% per year on invested capital, which is reduced from a typical market fee of 2.0%. - Admin fee: There will be a one-time admin fee that is split among all the investors, in the amount of $11,500 (or typically less than 1.0% of capital invested) to the Special Purpose Vehicle (SPV) to cover administrative, accounting, and legal costs. - Property management fee: 4% annual property management fee for Cypress to manage the property, which is in line with market. Cypress will manage this in-house (instead of hiring a third-party property manager), which keeps incentives aligned to manage the property better. - Construction management fee: 8% construction management fee for Cypress, which is in line with market to handle renovations. 75% of this fee will go towards an external construction manager. - For checks larger than $1,000,000, there will be additional profit sharing with the operators.