Financial Freedom CountdownAnother term is distribution waterfall, which refers to how capital gains are paid between all of the participants in a real estate investment.
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A waterfall model will typically have a lookback provision when the waterfall model pays out cash flow distributions before the asset’s disposition.
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If cash flow has met expectations in a given year and after the preferred return hurdle has been met, any excess cash flow that results in a profit is split between the parties, as stipulated in the deal structure.
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One key element of syndication is the real estate waterfall equity structure.
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The preferred return is the return expectation that the sponsor or general partner writes out in the operating agreement of a real estate project.
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In addition to the common equity waterfalls, there are the non-preferred return waterfall, the wacky waterfall, and the side letters waterfall.
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Cash Flows and Real Estate Waterfalls
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Real estate crowdfunding permits investors to invest in similar deals with smaller investment amounts avoiding the complexity of waterfall distribution.
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A waterfall model is most commonly used with a private equity fund and real estate deals.
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Distribution waterfall models are in place to ensure that profits are given to the manager only after the limited partners receive the agreed-upon return on their investment.
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