What is a GP Catch Up in CRE?

A general partner (GP) catch up is a provision in some real estate partnership agreements that allows the sponsor (GP) to “catch up” to their share of profits after the limited partner (LP) has received their preferred return. 

This structure is most common when the LP receives 100% of all distributions until they hit their preferred return and return of capital.  Once that first hurdle is achieved, the catch up ensures the GP receives enough of the subsequent profits to bring their total share in line with the agreed promote structure (i.e. 15% of profits).

Example: 

ABC Corp has identified a 100-unit apartment complex for a value-add acquisition.  They are partnering with a limited partner who will contribute 90% of the required equity ($8,873,112), while the general partner contributes the remaining 10% ($985,901). 

The partnership agreement includes an 8% preferred return to the LP and a 15% catch up provision based on total profit distribution realized in the preferred return hurdle.

We input the property-level levered cash flows into the equity waterfall (shown in green font).  On a deal level, the investment produces a 21.5% IRR and 2.5x multiple on invested capital (MOIC). 

The LP receives 100% of distributions until they’ve received their preferred return and full return of capital.  This is shown by the empty GP distribution rows (rows 22, 26, and 37).

At the capital event, the LP receives $9,432,721 (row 32).  Including the distributions from operations, this results in an 8% IRR to the LP (row 34), which satisfies the preferred return hurdle.

At this point, $12,381,284 remains ($21,814,005 - $9,432,721) (row 38), and the GP has not yet received any distributions.

The catch up provision now comes into play.  It determines how much profit the GP must receive to achieve a 15% share of total profit distributed up to this hurdle.  To calculate this:

• The LP’s total profit to this point equals $3,802,172 (sum of LP cash flows in row 34)

• Grossing up this amount by dividing by the LP’s 85% share gives $4,473,144, total profit at the partnership level

• The GP’s 15% share of that profit equals $670,972, which is the catch up amount (row 40)

After paying the GP their catch up, the remaining $11,710,312 ($12,381,284 - $670,972) (row 41) flows into the next tier of the waterfall.  

The GP catch up is designed to align incentives by rewarding sponsors for performance beyond the preferred return while ensuring that investors are made whole first.  Understanding how these provisions work is critical for negotiating JV terms and underwriting partnership economics.