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  • Writer's pictureOfer Vilenko

Multifamily Investing – Gleaning your True Returns as an LP

Updated: Feb 12, 2023

So, I got the investment memo and financial model from the sponsor, now what…?

One of the most acceptable compensation structures for sponsors in private equity real estate is the Promote structure. It is prevalent in funds as well as an individual deal/property structure (however for convenience we will discuss only an individual deal in this article). This begs the question: how can an investor evaluate what THEY get at the end of the day? In order to level the playing field let’s clarify a few key titles that are commonly used in our business:

  • Sponsor – Either fund entrepreneur or the specific deal entrepreneur. They are the ones who source it, lock it down, structure it, arrange financing and offer it to the investors. For our discussion let’s assume the Sponsor is one person or entity.

  • SPE or Special Purpose Entity – A holding vehicle and a very common way to structure an investment. May be an LLC or an LLP.

  • GP or General Partner – This is usually the Sponsor of the deal. In its capacity as a GP of the SPE the GP retains management and control rights over the deal and is responsible to deliver the returns to the investors. The GP is entitled to various fees and performance bonuses based on the actual results of the business plan for the deal. The GP may contribute anywhere from 0-10% of the required equity for the deal.

  • LP or Limited Partner – contributes the additional equity capital for the deal, but remains in a passive position and enjoys the returns of the deal based on the Waterfall.

  • Waterfall – details the order of priority and percentage of distribution of the distributable cash flow from the deal.

Going back to the title of this article, "Gleaning your True Returns as an LP". The key goes back to the financial model of the deal. In a perfect world, the financial model for a deal should include a special section that details the deal’s Sources and Uses. On the Sources side, we should see the equity and debt and on the Uses side, the property’s purchase price along with ALL the reserves and fees, including the ones collected by the GP.



We at VTS Capital Partners strongly believe that transparency and trust should be the basis of our relationship with our investors and partners, and that the burden of proof is on us. For that reason, we make it a point to clearly disclose under the Uses section, any and all closing costs or fees associated with the closing of the deal, as well as all the reserves we believe we will need in order to execute the business plan we developed for the deal. As it is said, it is a matter of transparency.

Similarly, our asset management fees are also part of the financial model that we present to our LPs, so the distributable cash flow our investors see at the end of the day is NET of all fees and they do not need to go into any additional calculations to determine their actual net returns AFTER the sponsor has collected its fees.

That brings us to the Promote structure, which simply put, is the bonus the GP collects based on his performance and the returns that the deal generates and is subject to the Waterfall.

Over my career, I have seen numerous versions of waterfalls, some more complex than others, but they all boil down to whatever terms the GP and the LP negotiate and agree upon to be the GP’s bonus, which is contingent on overall performance and the achievement of certain milestone metrics along the way. Many of these structures have some biases in favor of the GP baked into them and even though in theory certain compensation or equalization mechanisms (e.g. claw back) work perfectly, in real life they are much harder to enforce and may leave some LPs holding the bag.

Reflecting that one of our core VTS values is a strong belief on the need to have a strong alignment of interest with our investors/LPs our waterfall is IRR driven.

In plain language, this means that BEFORE we, as sponsors of the deal, see any promote on a deal, any and all investors who put up equity into that deal, get ALL their equity back, PLUS an amount equal to an annual return on that equity. In other words, in terms of priority, our entitlement to receive our promote comes second, only AFTER we have returned ALL the equity back to investors and provided an agreed upon healthy annual return on it “Preferred Return”.

Not only that, our financial model specifically details the waterfall. That way our investors can know immediately and at a quick glance see what THEY stand to profit on the deal, even after we have collected all our fees and promote.

As the late Supreme Court Justice Louis Brandeis said, “Sunlight is said to be the best of disinfectants…”

Mr. Vilenko is an experienced Real Estate professional with over 15 years of experience in real estate investments, including acquisitions, due diligence and asset management. He has held various executive leadership positions focused on private equity, real estate, structured finance and investment banking. Mr. Vilenko leads VTS Capital Partners’ investments process; being responsible for all aspects of the company's investment activities, from deal origination through analysis, contract negotiations, due diligence, project financing, asset management and asset disposition. In prior roles Mr. Vilenko served as Chief Investments Officer for CityR Group and Gaia Real Estate.

VTS Capital Partners “VTS”, is a full service real estate investment and asset management firm, specializing in value-added real estate transactions in the US with a strong focus on income producing properties; mainly in the multifamily and student housing space. Our mission is to provide sophisticated HNW investors and investment groups [family offices] with a platform through which they can diversify their asset allocation and complement their current investment portfolios, by providing them direct access to institutional quality real estate which, to date, has been predominantly reserved to financial institutions


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