Understanding the Waterfall Structure in Real Estate Private Equity Investments

Understanding the Waterfall Structure in Real Estate Private Equity Investments

Learn about this distribution framework used in real estate private equity investments.

Understanding the Waterfall Structure in Real Estate Private Equity Investments

Learn about this distribution framework used in real estate private equity investments. Understand the components of a waterfall structure, discover how the structure is designed to align with the risk and reward preferences of different stakeholders, and get insights on why it’s essential to understand before investing.

What is a Waterfall Structure?

In real estate private equity, a waterfall structure refers to a distribution framework that outlines how profits or returns generated from an investment property are distributed among various stakeholders, such as investors, sponsors, and general partners. It determines the sequence and priority of distributions based on predefined terms and conditions.
Typically, a waterfall structure is designed to ensure that profits are distributed in a way that aligns with the risk and reward preferences of different parties involved in the investment. The structure may be set up as a series of tiers or levels, with each tier specifying a different distribution percentage or preferred return threshold.

Components of a Waterfall Structure

A common waterfall structure in real estate private equity includes two main components.

  1. Preferred Return: The preferred return, also known as a “pref,” is a predetermined rate of return that is typically offered to the investors before any profits are distributed to other parties. It is usually set as a percentage of the initial investment amount, and once the preferred return is achieved, the distribution proceeds to the next component.
  2. Carried Interest: The carried interest, also referred to as “carry” or “promote,” is the share of profits that is distributed to the sponsor or general partner of the investment property after the preferred return has been met. It is usually calculated as a percentage of the remaining profits, after deducting the preferred return.

The waterfall structure may also include additional components or hurdles, such as catch-up provisions, clawback provisions, or multiple tiers with different distribution percentages, depending on the specific terms and conditions of the private equity investment.

Why is it Important to Understand the Waterfall Structure?

It’s important to note that waterfall structures can be complex and may vary depending on the specific deal and parties involved. It’s crucial for investors to carefully review and understand the waterfall structure and associated terms before participating in a real estate private equity investment to ensure they are aligned with their investment objectives and risk tolerance. Consulting with a qualified legal and financial professional is recommended for a thorough understanding of the waterfall structure in any given real estate private equity investment.

At Excelsior Capital, we prioritize transparency and education in order to foster successful real estate private equity investments. We are committed to helping our investors understand the waterfall structure in order to meet their investment goals.

To learn more about the waterfall structure or our available investments, please fill out this form and our team will be in touch.

Previous Articles

the-ultimate-guide-to-commercial-real-estate-investing

The Ultimate Guide to Commercial Real Estate Investing

Learn everything you need to know to assess the benefits of a commercial real estate investment and make the best decisions to get started.

Real Estate Accounting Fundamentals

Real Estate Accounting Fundamentals

Real estate accounting plays a crucial role in the financial management of investment properties, and it’s important to be aware of…

Navigating Investments In An Election Year, Strategies for Consideration

Navigating Investments In An Election Year, Strategies for Consideration

Investing during an election year can feel like a daunting prospect, given the uncertainties and apprehensions that often accompany political transitions.

embracing-distressed-opportunities-in-today's-commercial-real-estate-environment

Embracing Distressed Opportunities in Today’s Commercial Real Estate Environment

A myriad of formidable obstacles has opened up innovative pathways to success.

The Benefits of Infrared Saunas, Red Light Therapy & Cold Plunges

Join us as we sit down with Kristen Nicholson, entrepreneur and owner of Nashville’s first contrast therapy studio, Urban Sweat. Kristen is a healthcare professional with a background in health administration…

Why It Feels Impossible to Keep Up in Today’s Society

In this episode, host Brian Adams sits down with COO Jarrod Arnold to discuss the disconnect between the financial perceptions and realities facing younger generations today.

How Businesses Thrive and Grow in the Modern Age

Brian Adams is joined by Sarah Johal, co-founder of Parents in Tech Alliance, who highlights the harsh realities caregivers face in the workplace. From discrimination to lack of support, we learn how 75% of the workforce provides care, yet leaders fail to track this untapped talent pool losing billions annually.

Geopolitical Risk Considerations: The Biden Administration and U.S. Foreign Policy Challenges

Zack Cooper, senior fellow at the American Enterprise Institute and lecturer at Princeton University, joins us for an engaging discussion about geopolitical issues today.

Are We Nearing a Period of Stagflation?

Are We Nearing a Period of Stagflation?

The current economic landscape bears a striking resemblance to the 1970s and we may be entering a new era of stagflationary instability…

Excelsior Capital

A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.

Interested in learning more about Excelsior's investment opportunities?

Excelsior Capital

104 Woodmont Blvd, Suite 120
Nashville, TN 37205

investors@excelsiorgp.com

Disclaimer: Under no circumstances should any information presented on this website be construed as an offer to sell, or solicitation of an offer to purchase any securities or other investments. This website does not contain the information that an investor should consider or evaluate to make a potential investment. Other materials related to investments in entities managed by Excelsior Capital are not available to the general public.