​
Here's what I've got for you this week.

1. The IRR is a SCAM
   ​And so sayeth the first 'viral' LinkedIn post I made last week that you can view here. Bottom line; the IRR has its place, but the equity multiple aligns interests better. More below.​
   ​
2. BV Capital - Sponsored​
   In their latest offering, BV Capital are developing a 248-unit, Class A, ground up multifamily property in the Dallas-Fort Worth metro. Learn more here - and below.​
   ​
3. Podcast Episode 710: From medical devices to $2bn in CRE​
   Guest this week, Chris Larsen, transitioned from selling medical devices to commercial real estate and capital allocation. Learn how he's raised over $120 million and invested in $2 billion of projects.

Plus, a reminder of two main initiatives this year:

• Investors:​
  I'm looking for stable, light value add/core plus deals with accretive debt and well mitigated downside. Interested in the same?
  ​Join my investor group here.​
  ​
• Sponsors and Capital Allocators:
  Join the waitlist to get the exact system our clients have used to raise nearly $1bn in equity capital.
  ​Join the waitlist here.​

As always, please do not hesitate to email me directly if you have any questions.
​
Best,
Adam

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The IRR is a SCAM! Use this instead...

The Internal Rate of Return (IRR) has long been the dominant performance metric in commercial real estate investment. However, it has significant limitations that investment professionals should carefully consider.

We first encountered these challenges when a client proposed a traditional waterfall structure - similar to the example below - for a project with a 10+ year lifecycle. As we reviewed the proforma, we realized that with such a long timeline, even minor setbacks could prevent him from reaching his hurdles.

We recommended an equity multiple hurdle instead, which the client implemented. Since then, we’ve helped them raise approximately $16 million in equity from investors who preferred the new structure over the old.

Incidentally, I wrote about this on LinkedIn last week and the post went viral with over 600 comments.

​Click here to see the post and please join the conversation on LinkedIn.​

Here’s how it works.

Traditional Waterfall Structure

Most commercial real estate investment structures typically follow this kind of waterfall distribution:

• Investors receive an 8% preferred return
• Return of initial capital
• 80/20 profit split (Limited Partners/General Partners) until achieving a 15% IRR (or whatever)
• Subsequent profit split shifts to 60/40 or comparable arrangement

The IRR Conundrum

While this structure appears logical, using the IRR creates several challenges:

1. Time Sensitivity: IRR inherently penalizes extended hold periods, regardless of absolute returns
2. Misaligned Incentives: Sponsors may face pressure to exit investments prematurely to breach IRR hurdles for higher returns to themselves.
3. Market Reality Disconnect: External factors (economic downturns, interest rate fluctuations, market disruptions) that extend timelines negatively impact IRR despite being outside sponsor control

This creates a problematic decision matrix for investment managers:

• Hold the asset to maximize total returns but potentially miss IRR hurdles
• Divest prematurely to preserve IRR metrics and tap into higher splits for themselves – at the expense of absolute return potential

Alternative: Equity Multiple Approach

Consider instead a structure based on equity multiple - with one important addition not mentioned in the LinkedIn post, the sponsor catchup:

• Investors receive their preferred return
• Return of capital
• Sponsor catchup
• 80/20 profit split (LP/GP) until investors double their investment (2.0x equity multiple – obviously adjustable)
• Subsequent 60/40 split

The catchup, which is calculated based on the amount of preferred return already distributed to investors, provides the sponsor with profit share as soon as investors have received back their capital. This is very powerful and reduces incentive for sponsor to chase the EMx hurdle before receiving a share of profits.

Comparative Advantages

This alternative structure offers several benefits:

1. Alignment of Interests: Removes artificial timeline pressure, allowing sponsors to optimize for absolute returns
2. Clarity for Investors: Provides concrete performance targets that investors can easily conceptualize
3. Market Cycle Accommodation: Better accommodates inevitable market fluctuations without penalizing prudent hold strategies

While IRR remains a valuable metric for comparing investment opportunities, its limitations as a compensation mechanism should be recognized. Equity multiple-based structures may provide a more balanced approach that aligns sponsor incentives with investor outcomes across variable market conditions.

​Please take a look here on LinkedIn (you'll see how crazy this post took off) and leave a comment – I’ll do my best to respond as soon as possible.​
​
***

I'm looking for CRE investment opportunities with income, accretive debt to cap-rate, and mitigated downside despite all the current market uncertainty. If you'd like to join me, please complete this form, and I’ll be in touch.

Thanks all,
Adam
​

Sponsored by BV Capital

OPEN FOR INVESTMENT -
​BVCAP Mercantile Investors​

Ground-up Development Investment Opportunity​
​Arlington · Texas​
​248-Unit, Class A

Deal Highlights:

• $14,000,000 equity raise
• $100,000 minimum investment.
• 1.7x - 2.0x estimated investor multiple*
• 8-10% preferred return*
• 36-42 month estimated hold period

This offering is open to investors now.
​Learn more and access the offering docs here.​
​

* Due to various risks and uncertainties, actual returns may differ materially from the returns reflected. No return is guaranteed and investors risk the loss of the entire amount of their invested capital. Preferred Return is dependent on share class owned.

Podcast/YouTube Show:

Meet Chris Larsen, Next Level Income
​​
What happens when a former medical device pro brings precision, risk management, and analysis into real estate?

You get Chris Larsen, founder of Next-Level Income, who has placed $120+ million in equity across $2 billion in acquisitions as a capital allocator.

Mastering the Capital Allocator Model

Chris started as an active investor in multifamily, self-storage, and mobile home parks. Over time, he shifted to allocating capital, partnering with sponsors, negotiating better terms, and structuring investments to secure higher returns for investors.

Navigating Market Volatility

With interest rate swings and shifting markets, Chris has seen both wins and losses, including capital calls and suspended distributions. His strategy? Transparency and strong relationships, principles he carried over from his medical career.

The Power of Investor Relationships

Chris built a 300+ investor network through referrals, podcasts, and his book funnel. His ability to bridge expertise between high-risk industries makes his insights invaluable for navigating real estate like a pro.
​​
Quote:

"We’re going to invest $2 million in this project as maybe an anchor investor or a larger investor, and in that case, we may get 8, 9, 10% preferred return [vs. 7% on offer] and say, a 90% split of the profit [vs. 70%]."

Chris Larsen, Next Level Income

​
​Link to the full episode here >>​

​​If this is your first time seeing this newsletter, please click here to subscribe.​

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