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Hurdle Rate

Hurdle Rate
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In private real estate, the hurdle rate (or preferred return) is the minimum annual return that limited partners must receive before the sponsor can start sharing in profit splits. Commonly around 7– 8% for many private equity real estate deals, the hurdle rate aligns the sponsor’s incentives with investors’ goals: the sponsor (general partner) earns their performance-based “promote” only after investors have achieved this minimum return. In practice, it means a deal will first distribute cash flow to investors up to the hurdle (e.g. an 8% IRR or cash-on-cash), ensuring investors “get paid first.” Only after surpassing that threshold does the sponsor participate in excess profits. For high-net-worth investors, a hurdle rate is an important protection – it motivates sponsors like Lightstone to maximize returns on the deal and signals an alignment of interests (investors receive a base return before the sponsor’s upside kicks in).

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