Financial Modeling
Waterfall Mechanics
How distributions actually flow from gross deal economics to LP and GP pockets — preferred return, catch-up, promote tiers, clawback, and the American vs European split.
A waterfall is the rule set that decides who gets paid, in what order, and how much, every time a real estate deal or fund makes a distribution. The mechanics are deceptively simple in summary — return of capital, preferred return, catch-up, promote — but the structural choices inside each tier (American vs European, simple vs compounding pref, 80/20 vs 100/0 catch-up, interim vs end-of-fund clawback) routinely move 100–300 bps of net IRR to LPs without changing a single deal-level assumption.
These seven articles walk the institutional waterfall from the top tier down. Start with American vs European if you are orienting on fund structure. Start with promote and carried interest if you are pricing a single deal. Each piece includes the formulas, a worked example, and the LP-vs-GP economic implications.
7 articles
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American vs European Waterfall — Deal-by-Deal vs Whole-Fund Distribution
The difference between American (deal-by-deal) and European (whole-fund) waterfalls: when each is used, LP vs GP alignment, and how the same fund returns diverge.
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Promote and Carried Interest — Step-by-Step Calculation with Real Numbers
A worked example of promote and carried interest from first dollar to disposition: return-of-capital, preferred return, catch-up, and the GP split at each tier.
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Catch-Up Provisions: How 80/20 Actually Works
How a GP catch-up actually works after the preferred return is paid: 80/20 vs 100/0 catch-ups, the math, and why the wrong setup misallocates promote.
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Preferred Return: Simple vs Compounding vs Accruing
How preferred return mechanics shape LP outcomes: simple vs compounding interest, accruing vs current-pay, and how each treatment shifts promote crossover.
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Multi-Hurdle Waterfall Structures: 2-Tier, 3-Tier, and 4-Tier Promotes Explained
How multi-hurdle waterfalls partition returns: 2-, 3-, and 4-tier promote structures with 8/12/15% hurdles, GP splits at each tier, and where deal economics shift.
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Clawback Provisions: Interim vs End-of-Fund True-Up, Escrow Mechanics
How clawback provisions protect LPs from overpaid promote: interim vs end-of-fund true-ups, escrow mechanics, and the tax-distribution carve-outs to watch.
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GP Co-Investment and Alignment: How GP Capital Flows Through the Waterfall
How GP co-invest flows through the waterfall: pari passu vs side-by-side treatment, alignment economics, and what changes when GP capital sits with LPs.
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