Confusion Compounds Confusion

Legal documents generally are meant to be precise, clarifying obscurities that potentially may lead to multiple interpretations; however, many legal agreements have been drafted, signed and put into use based on misunderstandings of some financial concepts. If we believe there is an imperfection when in fact there is none, subsequent effort to fix the imperfection may result in unnecessary additional clauses that compound the obscurity and confusion. Frequently unclear (and at times, wrong) language is added, which may result in self-contradiction. This article introduces two frequently observed examples of confusion in the world of real estate joint venture operating agreements.

Confusion #1 – “XIRR Uses Daily Compounding?”

A widespread confusion shared by many legal, and occasionally, financial professionals is the belief that the XIRR formula in Microsoft Excel follows daily compounding, which is not true. The fact that XIRR can generate daily results does not mean it compounds daily; in fact, XIRR compounds annually, but it simply has the ability to provide results based on inputs from any given day.