Most General Partners (GPs) are familiar with the commonly used pro rata distribution model.
However, some may not be as familiar with how a software platform like Covercy
can make pro rata distribution payments the easiest part of your day. Try Covercy free today.
Ownership structure
In a commercial real estate investment, there are often multiple investors or partners who contribute capital to acquire or develop a property. Each investor’s ownership interest is typically determined by the amount of their investment relative to the total capital invested.
Profit distribution
When the property generates income or profits, such as rental income or the proceeds from a sale, the distribution of these financial benefits is often done on a pro rata basis. This means that the profits are divided among the investors in proportion to their ownership interests.
Calculation
To calculate the pro rata distribution, the total profits or income generated by the property are divided based on the ownership percentages of the investors. For example, if Investor A has a 40% ownership stake, and Investor B has a 60% ownership stake, the profits would be distributed accordingly.
Payment
Once the pro rata distribution is determined, the investors receive their share of the profits or income. This can be in the form of cash distributions, credited to their accounts, or reinvested into the project, depending on the specific terms of the investment agreement.
Pro rata distribution ensures that each investor receives a fair share of the financial benefits based on their investment. It aligns the distribution with the ownership interests and helps maintain equity among the participants in a commercial real estate investment.
Covercy helps General Partners & deal sponsors manage outside investors, calculate distribution payments, and transfer money to investor accounts. Try it free today.
Pro rata payment distribution software
General Partners (GPs) who take on outside investors in commercial real estate or other investment projects often have various software options available to help manage and disburse pro rata distributions to their Limited Partners (LPs). These investment management software solutions are specifically designed to streamline the distribution process, enhance transparency, and improve communication between the GP and LPs. While specific offerings and features may vary across different software providers, there are typically a few core features included.
Distribution management
These software solutions typically provide tools to manage and automate the distribution process. They allow GPs to set up distribution schedules, calculate pro rata or waterfall distribution models, and generate distribution statements. A handful of software solutions, like Covercy, integrate directly with CRE banking providers to payments can be made instantly and be traced to the cent.
Investor Reporting
The software may include investor reporting features, enabling GPs to generate detailed reports for LPs. These reports can include information about the property’s performance, cash flows, and pro rata distribution breakdowns.
Investor Portal
Many software solutions offer online investor portals, where LPs can access their investment information, view distribution statements, and track their pro rata distributions. Investor portals enhance transparency and provide LPs with real-time access to their investment data.
Document Management
These software platforms often include document management capabilities to store and organize legal agreements, subscription documents, and other relevant files. This helps GPs keep track of investor records and streamline documentation processes.
Communication Tools
Some software solutions provide communication features, such as secure messaging or email integration, to facilitate effective communication between GPs and LPs. This allows for quick updates, distribution announcements, and addressing investor queries.
Integration and Customization
Depending on the software provider, there may be options for integration with accounting systems, financial platforms, or other software used by GPs. Customization features may also be available, allowing GPs to tailor the software to their specific distribution workflows and reporting requirements.
Pro rata distribution payment example
Let’s consider a sample pro rata distribution example for a commercial real estate project involving a General Partner (GP) and 12 outside investors (Limited Partners or LPs). In this scenario, we’ll assume that the GP is entitled to a promote, which is an additional share of the profits beyond their ownership stake.
Let’s assume the total profits from the project amount to $1,000,000 & the ownership breakdown is as follows:
GP Ownership: 10%
LP1 Ownership: 8%
LP2 Ownership: 7%
LP3 Ownership: 6%
LP4 Ownership: 5%
LP5 Ownership: 5%
LP6 Ownership: 5%
LP7 Ownership: 4%
LP8 Ownership: 4%
LP9 Ownership: 4%
LP10 Ownership: 4%
LP11 Ownership: 3%
LP12 Ownership: 3%
Pro Rata
Calculations
The pro rata distribution calculation will be as follows:
Calculate the total ownership percentage (excluding the GP promote): Total Ownership Percentage = Sum of LP Ownership Percentages = 8% + 7% + 6% + 5% + 5% + 5% + 4% + 4% + 4% + 4% + 3% + 3% = 57%
Determine the GP promote: GP Promote = Total Profits * GP Ownership Percentage = $1,000,000 * 10% = $100,000
Calculate the LP pro rata distribution (excluding the GP promote): LP Distribution = (Total Profits – GP Promote) * (LP Ownership Percentage / Total Ownership Percentage)
For each LP: LP1 Distribution = ($1,000,000 – $100,000) * (8% / 57%) LP2 Distribution = ($1,000,000 – $100,000) * (7% / 57%) LP3 Distribution = ($1,000,000 – $100,000) * (6% / 57%) … LP12 Distribution = ($1,000,000 – $100,000) * (3% / 57%)
Calculate the total distribution to be made to all LPs: Total LP Distribution = Sum of LP Distributions
In this example, the GP would receive a promote of $100,000, and each LP would receive their respective pro rata distributions based on their ownership percentages. The specific amounts for each LP can be calculated using the formula mentioned in step 3.
Please note that this is a simplified example, and in real-world scenarios, the calculation may involve additional factors or adjustments as outlined in the partnership agreement or offering documents.
Distribution software built into an investment management platform like Covercy can streamline the calculation and payment distribution processes for GPs, making it easier to manage and grow their investment portfolios. Covercy’s banking integration makes it especially simple for GPs to distribute LP payments from one bank account to another instantly.
Outside of a simple pro rata distribution model, there are several other distribution payments that can be used in commercial real estate or other investment projects. These models or sub-models may be implemented based on the specific terms and agreements between the General Partner (GP) and the Limited Partners (LPs). Here are a few common payment types & models:
In a preferred return model, LPs receive distributions before the GP. The preferred return is a predetermined rate of return that LPs must receive on their invested capital before the GP becomes eligible for any share of profits. Once the preferred return is achieved, any remaining profits are distributed based on an agreed-upon sharing ratio.
A waterfall distribution structure is a sequential model that defines a hierarchy of distribution priorities. It outlines how profits or proceeds are allocated among different parties based on specific thresholds or tiers. For example, the waterfall structure may prioritize the return of invested capital, followed by the preferred return, and then allocate the remaining profits to the GP and LPs according to a pre-determined sharing ratio.
A catch-up provision, often used in conjunction with a waterfall structure, allows the GP to “catch up” to a certain percentage of profits once the LPs have received their preferred returns. The catch-up provision ensures that the GP receives a greater share of profits to compensate for any prior period when the LPs received a larger proportion.
A hurdle rate is a specified rate of return that must be achieved before certain distribution allocations are made. It acts as a benchmark, and once the investment performance exceeds the hurdle rate, the distribution sharing ratio may change or be adjusted.
A clawback provision is a mechanism that can be included in the distribution model to address potential imbalances or over-distributions. If the GP receives more profits than they were entitled to over the life of the project, the clawback provision allows for the excess amount to be returned to the LPs.
Preferred Return
In a preferred return model, LPs receive distributions before the GP. The preferred return is a predetermined rate of return that LPs must receive on their invested capital before the GP becomes eligible for any share of profits. Once the preferred return is achieved, any remaining profits are distributed based on an agreed-upon sharing ratio.
Waterfall Structure
A waterfall distribution structure is a sequential model that defines a hierarchy of distribution priorities. It outlines how profits or proceeds are allocated among different parties based on specific thresholds or tiers. For example, the waterfall structure may prioritize the return of invested capital, followed by the preferred return, and then allocate the remaining profits to the GP and LPs according to a pre-determined sharing ratio.
Catch-up Provision
A catch-up provision, often used in conjunction with a waterfall structure, allows the GP to “catch up” to a certain percentage of profits once the LPs have received their preferred returns. The catch-up provision ensures that the GP receives a greater share of profits to compensate for any prior period when the LPs received a larger proportion.
Hurdle Rate
A hurdle rate is a specified rate of return that must be achieved before certain distribution allocations are made. It acts as a benchmark, and once the investment performance exceeds the hurdle rate, the distribution sharing ratio may change or be adjusted.
Clawback Provision
A clawback provision is a mechanism that can be included in the distribution model to address potential imbalances or over-distributions. If the GP receives more profits than they were entitled to over the life of the project, the clawback provision allows for the excess amount to be returned to the LPs.
Selecting the right distribution model
Before selecting a distribution model with Limited Partners (LPs) on a commercial real estate project, General Partners (GPs) should be aware of the following key considerations
Alignment with Investor Objectives: GPs should thoroughly understand the objectives and preferences of their LPs. This includes considering factors such as their desired level of involvement, risk appetite, liquidity needs, and desired return profiles. By aligning the distribution model with these objectives, GPs can enhance investor satisfaction and attract capital.
Clear Communication and Transparency: It is crucial to establish clear and transparent communication with LPs regarding the distribution model and the pro rata calculations. LPs should have a comprehensive understanding of how distributions will be determined, the timing of distributions, and any potential complexities involved. Open and ongoing communication helps build trust and maintain a healthy GP-LP relationship.
Partnership Agreement and Legal Considerations: The distribution model should be clearly defined in the partnership agreement or operating documents. It is essential to work with legal counsel to ensure the distribution model complies with applicable laws, regulations, and tax considerations. The agreement should clearly outline the pro rata calculations, any additional provisions, and the rights and obligations of both GPs and LPs.
Flexibility and Adaptability: GPs should consider the flexibility of the chosen distribution model. Commercial real estate projects can have varying performance and market conditions. A distribution model that allows for adjustments or modifications to accommodate changing circumstances can be advantageous. GPs should also assess the potential impact of different scenarios, such as refinancing, capital events, or project extensions, on the pro rata distributions.
Financial Modeling and Sensitivity Analysis: GPs should conduct thorough financial modeling and sensitivity analysis to understand the implications of the chosen distribution model on cash flows, project returns, and overall profitability. This analysis helps assess the potential impact of different factors, such as variations in property performance, market conditions, or unforeseen events, on the pro rata distributions and project outcomes.
Regulatory and Reporting Requirements: GPs must ensure compliance with regulatory and reporting requirements applicable to the distribution model. Depending on the jurisdiction and the characteristics of the project, there may be specific rules and obligations to follow. GPs should be aware of these requirements to avoid any legal or regulatory issues.
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