Property C has two partners, Operator and Finance
Property C has a single tenant and NOI of $15 million in year one. The building is purchased for cash at a cap rate of 6%. The operator invests 15% of the purchase price and finance partner invests the remainder. From any operating cash flow, the partners agree that the finance partner will have a preferred payout of 6%, simple interest. The operator will then receive 6% from operating cash flow. If there is any excess cash flow it will be held as a reserve to fund any operating deficits or capital needs. If a reserve still exists at the end of the transaction it will be added to the sales proceeds and distributed.
Upon sale, the finance partner receives a preferred return of all invested capital and 6% annual, simple interest, to the extent it has not yet been paid. Next, the operating partner receives a return of all invested capital and 6% annual, simple interest, to the extent it has not yet been paid.
The operating partner then receives 2x its pro rata share of any available excess proceeds and the finance partner receives the balance.
The partners agree to fund any operating deficits or required capital pro rata to their initial investments. If necessary, such new investments will be added to each partners “investment” balance and will then become subject to all the provisions of the waterfall described above on a going forward basis.
Property NOI will increase to $20 million in year three. The next year, sadly, the tenant fails. In year four, no rent is received and expenses for the empty building are $3 million. Happily, a new tenant is quickly found. The new lease requires an investment of $5 million in year 4 to fix up the building. The partners agree.
On the first day of year five, the new tenant starts a new long-term lease that will result in $10 million in annual NOI. In each of the next two years, the NOI will increase by $1 million per year.
The building is sold in year seven at a cap rate of 5%. Assume all amounts are passed to partners pre-tax.
How much will the Operating Partner receive from the sale?