Free tool
Preferred return calculator
Enter LP capital, the pref rate and what you expect to distribute each year. Compare simple and compounding, cumulative and non-cumulative — with a year-by-year table and no sign-up.
Updated
Pref terms
1 to 30 years
Cash paid toward the pref each year. Use 0 for none.
Pref accrued
$425,998
Pref paid
$250,000
Unpaid pref owed
$175,998
Cash above the pref
$0
$175,998 of unpaid pref is still owed at the end of year 5. In a typical waterfall it is paid from sale or refinance proceeds before any profit split.
| Year | Accrued | Paid | Unpaid carried |
|---|---|---|---|
| 1 | $80,000 | $50,000 | $30,000 |
| 2 | $82,400 | $50,000 | $62,400 |
| 3 | $84,992 | $50,000 | $97,392 |
| 4 | $87,791 | $50,000 | $135,183 |
| 5 | $90,815 | $50,000 | $175,998 |
Illustrative, not investment advice. Assumes one LP capital balance, annual periods, and distributions paid at year end toward the pref first. Cash above the pref does not reduce capital here; many agreements return capital next, which lowers later accruals. CREAssets runs real waterfalls on dated cash flows under your operating agreement's terms.
How a preferred return works
A preferred return, or pref, is the annual return limited partners receive before the general partner shares in profits. It is stated as a percentage of contributed capital, and the rate is negotiated deal by deal. A pref sets an order of payment, not a guarantee: if the property does not produce the cash, the pref goes unpaid.
Simple vs compounding
A simple pref accrues on contributed capital only. On $1,000,000 at 8%, it accrues $80,000 a year, whatever is still unpaid from earlier years. A compounding pref also accrues on unpaid pref, so a shortfall grows. With no distributions over five years, a simple 8% pref accrues $400,000; compounded annually it accrues $469,328. If the pref is paid in full every year, there is nothing to compound and the two are the same.
Cumulative vs non-cumulative
With a cumulative pref, any shortfall carries forward and must be paid before the GP shares in profits — usually from refinance or sale proceeds. With a non-cumulative pref, a shortfall in one year lapses and is never made up. Compounding only matters when the pref is cumulative, because only then is there an unpaid balance to accrue on.
A worked example
LPs contribute $1,000,000 with an 8% pref. The deal distributes $50,000 a year for five years.
- Simple, cumulative: $80,000 accrues each year and $50,000 is paid, so $30,000 carries forward. After five years, $150,000 of pref is still owed.
- Compounding, cumulative: year two accrues on $1,030,000, so $82,400. The gap widens each year, and $175,998 is owed after year five.
- Non-cumulative: $30,000 lapses each year. LPs give up $150,000 of pref, and nothing is owed at sale.
The same deal, the same cash: the LPs are owed between $0 and about $176,000 at exit depending on two terms in the operating agreement.
What your agreement decides
This calculator uses annual periods and one capital balance. Real agreements also set when the pref starts accruing (usually each contribution date), the day count, whether returned capital reduces the base, and whether accrued pref or return of capital is paid first. CREAssets runs real waterfalls on dated cash flows, so those terms are applied to the actual dates money moved. See how in waterfalls and distributions.
To see what happens after the pref — catch-up and promote — try the waterfall calculator, check returns with the IRR and equity multiple calculator, or read how real estate waterfalls work.
Related calculators
- Real estate waterfall calculator
Return of capital, compounding pref, GP catch-up and two promote tiers — LP and GP splits instantly.
- Waterfall model in Excel (free download)
A three-tier IRR-hurdle waterfall with live formulas — pref, two promote tiers, LP and GP IRR by year. No sign-up.
- IRR and equity multiple calculator
Enter equity, yearly cash flows and sale proceeds — get IRR, equity multiple, cash-on-cash by year and average annual return.
- Cash-on-cash return calculator
Annual pre-tax cash flow over total cash invested — the yield on your equity, with monthly cash flow.
Preferred return questions
Is a preferred return guaranteed?
No. A pref is a priority in the distribution waterfall, not a promise of payment. If the property does not produce the cash, the pref is not paid; a cumulative pref is still owed and is paid later, in the order the operating agreement sets.
Does the preferred return include return of capital?
No. The pref is a return on capital. Return of capital is a separate tier in the waterfall, and agreements differ on whether it is paid before or after the accrued pref.
Why do simple and compounding give the same answer?
Compounding only adds pref on unpaid pref. If distributions cover the pref in full every year, or the pref is non-cumulative, nothing carries forward and the two methods match.
What is the difference between a preferred return and a hurdle?
The pref is usually the first hurdle: LPs receive it before the GP shares in profits. Later hurdles, often set on IRR or equity multiple, change the LP/GP split as returns rise.
Does this match my operating agreement?
It is an illustration with annual periods and one capital balance. Real agreements accrue from each contribution date, use a stated day count, and may reduce the base as capital is returned. In CREAssets the waterfall engine runs on your dated contributions and distributions.
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