Question

A partnership agreement provides that, at sale, cash proceeds are distributed first to Mr. Smith so that he earns a 7% preferred return, second, in an amount equal to his original investment less any cash distributions previously received, then split 80-20 (aka a promote structure) between Mr. Smith and Ms. Jones.

The investment is held for 3 years and the net cash flows from sale are $1,084,000. How much would Mr. Smith receive if his initial investment was $400,000? Assume there have been no payments to the partners during the ownership (aka holding) period.

Answer 1

At first Mr Smith will receive 7% of his investment, that is $400,000 (The return is not mentioned yearly, so i am considering that it is one time)

First Payment to smith = 7% of $400,000

= 28,000

Net proceeds after payment of 7% interest to Mr Smith = Net Proceeds before payment - Interest payment

= 1,084,000 - 28,000

= 1,056,000

Now this proceed will be distributed in the ratio of 80 :20

So Mr Smith's Share is 80%, that is 80% of 1,056,000

= 844,800

Total share of Mr Smith = 1st share + 2nd share

= 28,000 + 844,800

= 872,800

So Mr Smith received $872,800