Preferred Return Calculator

Preferred return is the minimum yield LP capital receives before sponsor promote kicks in. This calculator runs either simple or compounding pref and checks it against actual distributions paid — showing accrued shortfall or overpayment credit.

Invested capital (LP)

Preferred return rate

Years held

Compounding

Actual distributions paid

Cumulative preferred return owed

$1,600,000

Preferred return per year

$320,000

Unpaid (accrued) preferred return

$400,000

Overpaid (credit toward future)

Capital + pref owed

$5,600,000

How the math works

Preferred return is a floor return paid to LP capital before any promote flows to GP. If distributions don't cover the pref, the shortfall accrues (compounding or simple, per the LPA). Overpayment typically credits forward against future pref — it rarely flows to promote.

Most sponsors run an 8% simple pref; 10%+ preferred is common on higher-risk development deals. Compounding pref is harder on the sponsor because unpaid pref grows on itself.

How to Use

Enter LP invested capital and the pref rate (commonly 8%).
Enter years held.
Choose simple (most common) or compounding pref.
Enter total actual distributions paid to LP to date.
Read cumulative pref owed and accrued shortfall.

Frequently Asked Questions

Simple vs compounding pref?

Simple: pref is 8% per year on original capital. Compounding: unpaid pref accrues and earns its own pref. Compounding hurts sponsors in slow cash flow years — always check which applies in the LPA.

Pref on distributions or capital?

Traditionally pref runs on invested capital remaining — i.e., as capital is returned, pref base shrinks. Some LPAs pref on original capital regardless. Read carefully.

Return vs yield?

Pref is a return threshold, not a guaranteed yield. Unpaid pref just accrues — it doesn't create a creditor claim. If the asset fails, pref doesn't come back.