I am excited to share the free Partnership Distribution Excel Template for active investors. I advise you to sign up below, check your email, open the workbook, and follow along. This article will serve as a tutorial.

Download our Free Tactica RES™ Carried Interest Partnership Template for Active Investors

An intuitive partnership distribution model that simplifies which partner(s) has carried interest and at which partner's expense. Compatible with all free and paid Tactica tools.

Real Estate Investment Partnerships

There are two significant classifications of real estate investment partnerships.

• Active

• Passive

This tool is for active real estate partnerships where all partners have a role in the investment. I've received interest from Tactica subscribers to provide them with a partnership distribution model that they could utilize when investing in multifamily real estate with friends.

To be clear, this distribution model is not for syndications. Syndications will commonly feature a GP/LP structure where most investors would have passive interest (LP statuses) and receive distributions without being actively involved in the daily operations of the asset. For GP/LP partnerships, I have another blog series covering the most common partnership distribution structures.

This particular blog post and download pertains to situations where:

Every investor has an active role in acquiring, financing, managing, brokering, asset managing, or disposing of the property. Each person has a skill or expertise that contributes to a successful outcome.

Pari Passu Real Estate

Cash flow distributions would often be made on a pari-passu basis when a small group of investors pools their capital and expertise to acquire and manage real estate.

Pari-Passu = Equal Portion

So, if an investor contributed 20% of the equity required to close the deal, they would be entitled to 20% of the distributions/profits. That's intuitive. 

Some subscribers struggled to consider how to allocate additional ownership interest to partners in the deal beyond their initial equity contribution. 

For example, suppose one of the partners found the deal, even though they contribute 50% of the total equity. In that case, they may demand another 5% of ownership interest (55% overall) for their role in finding the property. If it weren't for them, there would be no investment. If there were one other partner, the other partner would still put in 50% of the total equity required to close but only be paid 45% of the cash flow distributions, sacrificing a small share of their ownership interest to compensate the partner that found the deal.

This additional profit interest is commonly referred to as carried interest. Figuring out carried interest with two partners is easy. However, when there are four or five partners, all with adjusted profit interests, it can become quite a convoluted process to understand which partner has carried interest and at which partner's expense.

First, let's review the term carried interest. 

Carried Interest Definition

Carried interest is a common theme in many real estate partnerships. It can be considered a tool to incentivize the managing partner (also referred to as the general partner or sponsor), as it will typically earmark a disproportionate amount of investment returns to the manager if the investment is successful. Success tends to mean higher investment returns. When realized (typically at reversion), these outsized profits will be considered long-term capital gains if the investment is held for at least one year.

Disclaimer: The IRS’s handling of carried interest is another topic entirely and is beyond the scope of this article. Consult an attorney and accountant to verify partnership structuring and tax treatments.

Carried Interest Calculation Example #1

Three friends will purchase a 20-unit apartment building for $2,000,000. They expect to qualify for a $1,500,000 loan. They will be left contributing $500,000 in equity.

Partner A is a realtor who found the deal. She will also spearhead the financing. She has relationships with lenders and a steady pulse on the market and will keep tabs on opportunities to refinance or sell the property when the timing is optimal.

Partner B is an attorney. He plans to help with purchase/sales agreements, crafting the resident lease language, and helping with evictions if they ever come up.

Partner C will manage the property and handle all the maintenance and leasing.

The partners initially agreed to contribute equal capital to fund the deal (33% each or $166,500 per person).

This workbook should help you quickly calculate profit interests for various partners with fluctuating carried interests. First, you must grab the project cash flows and paste them into the Excel workbook.

This cash flow can come directly from your underwriting workbook. You can copy/paste or grab/drag with an "=" from your source workbook. You can paste up to a 10-year investment hold. I will take cash flows directly from the Tactica Value-Add Model.

If your hold is less than ten years, that’s fine; you can leave cells blank, like in the example image above.

Now we can start playing with:

• Contribution Amounts

• Contribution Percentages

• Carried Interest

• Adjusted Profit Interest

*I call Contributions “Equity” in the Excel spreadsheet to take up less column space.

Like all Tactica Tools, brown text cells are your responsibility.

Let's continue with the same scenario laid out above. Partner C, the property manager, decides he will not charge a management fee. However, to compensate him for his time and effort in handling the daily operations, he requests an additional profit interest on top of his 33.33% to pay him for his role. Partners A and B agree to give Partner C an extra 2.5% or 5% total. 

What if the partners agreed that only Partner B would subsidize Partner C's 5%?

If carried interest in the total column doesn't = 0%, it will glow red to inform you there needs to be an adjustment to make it all equal. The same red glow will happen in the Total Contribution $ cell if it doesn't equal the equity required in the project cash flows above.

Carried Interest Calculation Example #2

Using the same three partners, let's switch up the scenario slightly. Let's say Partner A has no money to put in the deal. She, however, demands a carried interest of 5% for finding the opportunity, a 2% fee for guaranteeing the loan, and 3% for selling the deal one day (she will not take a commission). She will have a 10% carried interest but will not contribute anything on the front end.

We can even make it more confusing and say that Partner A gets 10% without putting equity into the deal. Partner C still wants an additional 5% carried interest for managing the property. Now Partner B will need to give up 15%

These changes we’ve been making are flowing through the distribution model and calculating each partner:

• Net Distribution

• Individual IRR

• Individual Equity Multiple

Carried Interest Calculation Example #3

Let's throw in one more twist. This property also requires an extensive renovation and repositioning effort. For simplicity's sake, we assume the construction costs are already factored in the $2,000,000 purchase price. Partners A, B, and C decide to bring in a 4th partner. Partner D is a contractor by trade, and he will oversee the rehabilitation of the building. He will put in 7% of the original equity contribution and receive another 5% in carried interest.

Partner A: Contribute 0% in initial equity but will maintain a 10% carried interest for her role in buying, financing, and selling the property

Partner D: Contributes 7% in initial equity plus 5% in carried interest.

Partners B and C must cover 93% of the equity (or $232,500 per person).

The partners that benefit from a carried interest will always see higher returns (IRR and equity multiples) than the project and partners losing ownership interest to support the carried interest. The IRR and Equity Multiple cells for Partner A are blank. This is because you can’t have a return if you don’t put any money into the deal.

Active Real Estate Investment Partnership Spreadsheet

This tool can be used with your ordinary underwriting workbook to calculate real estate partnership distributions that require carried interest adjustments. You must input project cash flows from your spreadsheet, adjust contribution amounts, and carry interest adjustments for each investor. If you haven’t downloaded this tool yet, you can do so below.