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Hari Mann ( source )
Unpopular opinion after analyzing 100+ multifamily deals:
IRR-based structures often reward sponsors more than investors.
Say you invest in a $1M 5-year project with this structure.
- 8% preferred return.
- 70/30 split to investors/sponsors.
- 15% IRR with a 50/50 profit-split above that.
On paper, it implies that the sponsor is being incentivized to push for high returns.
Most GPs know that IRR is time-sensitive.
So, they use it to trigger the 15% IRR as quickly as possible.
This is what they do:
1) Over-leverage the deal (less equity = higher IRR).
2) Push for an early exit (selling earlier increases IRR).
3) Use a credit line instead of calling capital upfront (shorter hold = better IRR).
At the end of 5 years, you are happy with a high-performing deal that gave a 21% IRR, without knowing that the exit was rushed and your returns were capped so the sponsor could hit their bonus faster.
I keep seeing many LPs failing to recognize the opportunity cost of this loss of upside.
Which is why relying on IRR alone is a dangerous shortcut.
So the next time you underwrite a deal, here's what you should do:
1) Prioritize EM over IRR. It tells you how much money you’ll actually make.
2) Question the drivers of the quoted IRR more than the IRR. Better to back off if you notice signs of early sale, high leverage or credit gimmicks.
3) Always demand clarity on the hold strategy.
A great deal should still make sense even if the IRR hurdle didn’t exist.
Hope this helps!