Hi Cal

Doing the waterfalls were actually very easy. I need to know just the
answers to the following questions:

Am I correct in stating that the ratio of allocation between Waterfall 1 and
Waterfall 2 is 75% to 25%? In other words, with the $40, 75% ($30) goes to
Waterfall 1, where it is split 80-20.

Secondly, if there is an overflow into waterfall 3, what ratio of
allocation is done to devide the returns between Waterfalls 1, 2 and 3?
E.g., do you now allocate 60%, 30% and 10% to each of the waterfalls? E.g.
if you have a CF of $300, having given Inv 1 his $100, you remain with $200,
to be shared across waterfalls 1, 2 and 3. Will you do a 80-20 split on $120
in waterfall 1, a 50-50 split on $60 in waterfall 2, and an 80-20 split on
$20 in waterfall 3?

Let me reiterate:

Is a 75-25 allocation between Waterfalls 1 and 2 correct?
What allocation should I use if Waterfall 3 also comes into play.

I have used 60-30-10, and my formulae handle this perfectly.

--
ve_2nd_at. Randburg, Gauteng, South Africa


" wrote:

Sorry about my explanation skills...it seems that this project is a
little beyond me but I'll do my best to explain just this particular
portion.
We have a CF of $200 for the third period. The preferred return of 10%
must be deducted from that CF before we move on to the splits so I
deducted $100 which is 10% of the initial investment of $1000. Then I
deducted any carryover from previous periods that did not meet the
required return, in this case there was a carryover of $50 from the
first period since our obligation was $100 but we only provided $50,
and $10 from the second period (obligation of $100 but only paid $90).
This carryover amount ($60) must be added to the third period's
required return to satisfy the required return for the preferred
investor. This leave $40 ($200-$100-$60 = $40). It sounds funny but
once all these requirements are met and the preferred investor has
received his 10% required return per year not including interest, I can
now calculate the amount left over ($40) at the related waterfall
levels, which in this case happens to be the first two waterfalls.
You'll notice that although there is a CF of $200, we calculate the
$40 starting at the 10-13 percent waterfall. This is not a mistake. Our
10% return is paid for the period and we subtracted the carryover
(which is ignored) making it seem as if though we had a CF of $140
instead of the $200...so we start our calculation using the waterfalls
using the $140 amount. Since the first waterfall level is between 10%
and 13% of the total investment and we already met required return of
$100 (10%) for the period, I must then calculate the waterfalls for the
remaining $40, which gives us $30 at 80/20 split for the first
waterfall. This amount is then split between the two investors giving
the preferred investor 80% of that $30 or $24 and giving the secondary
investor 20% of the $30 or $6. The remaining $10 is part of the second
waterfall but it does not reach the third waterfall (because the 20%
threshold is not reach to move to the third water). Since the split for
the second waterfall is 50/50, the preferred investor will get 50% of
that $10 or $5 and the secondary investor will get the other 50% of the
$10 ($5).
I'm not sure if this explanation is logical enough but I hope this
helps. I'm going to try the formulas you provided me with and let you
know how far they take me.
Thanks again for your tremendous help.
Cal