Preferred return accrual and coverage calculator
This calculator shows how much preferred return has built up on invested equity and how much of it remains unpaid. It also tests whether this year’s cash covers a full year of the claim. The question it answers: what does the sponsor owe limited partners before profits are split, and can the property pay it?
Calculator
| Preferred return accrued to date | |
|---|---|
| Accrued and unpaid balance | |
| Preferred return for one year on invested equity | |
| Coverage of one year of preferred return by available cash | |
| Shortfall added to the unpaid balance this year |
Formulas
- Simple accrual = invested equity x rate x years
- Compounded accrual = invested equity x ((1 + rate) to the power of years - 1)
- Unpaid balance = accrued - distributions paid, floored at zero
- Coverage = cash available / one year of preferred return
- A preferred return is a priority claim on distributions, not a promised payment
Worked example with the starting inputs
With the starting inputs in the form (invested equity $5,000,000; preferred return rate 8 percent; years outstanding 3 years; distributions paid so far $600,000; cash available for distribution this year $400,000; accrual method (0 simple, 1 compounded annually) 0), the results are: preferred return accrued to date: $1,200,000; accrued and unpaid balance: $600,000; preferred return for one year on invested equity: $400,000; coverage of one year of preferred return by available cash: 1.00x; shortfall added to the unpaid balance this year: $0.
These inputs are hypothetical and are shown only so the arithmetic can be checked by hand.
What the preferred return result means in a real deal
In a real deal the preferred return lives in the distribution waterfall of the operating agreement, where limited partners are paid before the sponsor takes any promote. The accrued number shows what the waterfall must clear. The unpaid balance shows how much of the claim was carried forward because operations threw off too little cash. Both figures show up in investor reports and get tested again at a refinance or a sale.
A preferred return is a priority claim on distributions, written into the operating agreement. It places limited partners ahead of the sponsor’s promote in the waterfall, and the property’s cash decides whether that place yields payment.
How to read and stress the coverage result
Start with coverage. Now cut the cash. Ask what happens if the appraiser lowers value and the lender resets to a higher cap rate, or if the loan agreement traps cash because debt service coverage slips. Watch how fast the unpaid balance grows when coverage drops under a full year.
Also test the distributions paid input.
Where the preferred return result misleads
The page uses one rate and one accrual choice. A term sheet or operating agreement may add a catch up or a hurdle tied to an internal rate of return, and this math does not capture it.
Compounding conventions differ. Some documents compound annually on the unpaid balance only, others on the full contribution, and the calculator applies the formula to invested equity alone. Lender documents add another layer: a loan agreement can bar distributions while a debt service coverage test fails, so a sponsor may owe a preferred return that cash cannot reach. Cash available this year also ignores reserves and capital calls. Treat the unpaid balance as a claim under the operating agreement. It can sit unpaid for years, and a sale or refinance may still leave it unsatisfied. Read the document.