Deal Structures | Waterfalls
Profit Waterfalls, Preferred Returns, and Promotes
A waterfall is the order in which money flows out of a JV at sale or refinance. The equity split percentage matters less than the waterfall — because the waterfall decides who gets paid first, who gets paid most, and who has to wait.
The Standard Four-Tier Waterfall
Return of Capital
Trigger: First distributions until each partner has received back contributed capital
Split: 100% pro-rata to capital contributors
Protects capital before anyone takes profit
Preferred Return
Trigger: After return of capital, until capital has earned a stated IRR (commonly 8%)
Split: 100% pro-rata to capital contributors
Pays capital a risk-adjusted baseline return
Catch-Up
Trigger: After pref is paid, sponsor 'catches up' on promote
Split: Commonly 50/50 or 100% to sponsor until promote is current
Lets the sponsor / builder reach their share of pref-level profits
Promote / Carry
Trigger: All remaining profit above pref + catch-up
Split: Commonly 70/30 or 80/20 (capital / sponsor)
Aligns the sponsor with upside; the harder the deal, the bigger the promote
Worked Example: $1.2M Profit on a Vancouver 6-Plex
Assume a Vancouver 6-plex JV with $2.0M land, $0.8M capital partner cash, $0.3M sponsor cash, $3.3M senior debt, and $1.2M of profit at sale 24 months later.
Numbers are illustrative. Real waterfalls also have to handle GST, holdbacks, lender fees, and final reconciliation. This is the shape, not a substitute for a tax-advised model.
Best For
- ✓ First-time JV partners trying to model their actual take-home
- ✓ Sponsors testing whether their proposed waterfall is competitive
- ✓ Capital partners pressure-testing what they would actually receive
Usually Fails When
- ✕ You compare equity splits without comparing waterfalls
- ✕ You assume the sponsor's spreadsheet is right without re-modeling
- ✕ The waterfall has no return-of-capital tier
What To Verify Before Spending Money
- → Every tier has a clear trigger, a clear split, and a clear endpoint
- → Pref accrues even if no distributions happen during construction
- → Catch-up percentage is reasonable for the deal size
Official Sources Referenced
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