What is an IRR True-Up in CRE?

An IRR true-up is an adjustment mechanism, typically applied at the end of an investment, that ensures an investor actually receives the negotiated target internal rate of return (IRR) based on timing of real cash flows, not just projected ones.

Because IRR is highly sensitive to timing, even small delays or uneven distributions can cause realized returns to fall below the intended hurdle.  A true-up corrects for that difference.

How it works

Instead of relying on projected timing, the waterfall recalculates the investor’s actual IRR using realized cash flows.  If the realized IRR falls short of the target, additional proceeds are allocated to that investor until the hurdle is met.  Once achieved, remaining cash flows move to the next tier of the waterfall. 

Example: 

The LP is entitled to an 8% preferred return before the GP participates in any promote.  Based on the original underwriting, the projected cash flows would have resulted in the LP achieving that 8% IRR.  However, because lease-up was delayed, cash flows in years 1 and 2 were lower than expected.  When the investment exits and the realized cash flows are run through an IRR calculation, the LP is only achieving a 7.6% return.

At that point, an IRR true-up is applied.  An additional $758,174 is allocated to the LP so that their realized IRR is brought up to the full 8% hurdle.  Only after the LP is made whole does any remaining cash flow move into the next tier of the waterfall where the GP participates in promote.  In other words, there is $758,174 less cash flow available for the next waterfall tier which would have otherwise gone towards the GP’s promoted return.

Additional Note: Similar concepts can also appear on the debt side in structured loans where a lender targets a specific IRR and needs protection against early payoff, irregular cash flows, or timing risk.  The principle is the same, aligning realized returns with the agreed-upon target.

Why it matters? IRR true-ups can materially change sponsor and investor economics at exit.  Even when total profit is unchanged, reallocating cash to satisfy an IRR hurdle can shift meaningful dollars within the capital stack.  That’s why understanding how true-ups work and modeling them correctly is critical when evaluating any promoted structure.