A waterfall shows how, to whom and when funds are paid out in an apartment syndication deal. It details the returns the Limited Partners and the General Partners will receive. In this series, I’ll outline 5 waterfalls structures common to most apartment syndication deals.
8% Preferred Return Only
Compensation structure: Class A passive investors receive an annualized 8% preferred return only. Class B General Partners receive all profits.
Waterfall for cash flow
- Cash flow is distributed to Class A until they receive an annualized return of 8% based on their initial capital contribution.
- Any remaining distributable cash flow is distributed to Class B
Waterfall for capital transaction (i.e., a sale, supplemental, or refinance)
- Repay the unreturned capital contributions of Class A investors (i.e., their initial equity investment amount)
- Make up arrearages in Class A preferred returns (if applicable)
- Any remaining distributable cash is distributed to Class B.
General Partner Catchup
Compensation structure: Class A passive investors receive an annualized 8% preferred return and 70% of the profits. Class B General Partners receive an annualized 3.43% preferred return and 30% of the profits.
Waterfall for cash flow
- Cash flow is distributed to Class A until they receive an annualized return of 8% based on their initial capital contribution
- Cash flow is distributed to Class B until they receive an annualized return of 3.43% based on the Class A initial capital contribution (3.43% is the equivalent to a 70/30 split between Class A and Class B – 70/30 = 8/x; 70x=240; x=3.43)
- Any remaining cash flow is split 70/30, with 70% paid to Class A and 30% paid to Class B
Waterfall for capital transaction
- Repay the unreturned capital contributions to Class A investors (the amount is either the initial equity investment or the reduced equity investment based on the capital returned from 70% profit splits)
- Make up arrearages in Class A preferred returns (if applicable)
- Make up arrearages in Class B preferred returns (if applicable)
- Any remaining cash flow is split 70/30, with 70% paid to Class A and 30% paid to Class B
Passive Investor Tiers
Compensation structure: Class A passive investors receive an annualized 10% preferred return. Class B passive investors receive an annualized 7% preferred return and 70% of the profits. Class C General Partners receive 30% of the profits.
Waterfall for cash flow
- Cash flow is distributed to Class A until they receive an annualized return of 10% based on their initial capital contribution
- Cash flow is distributed to Class B until they receive an annualized return of 7% based on their initial capital contribution
- Any remaining cash flow is split 70/30, with 70% paid to Class B and 30% paid to Class C
Waterfall for capital transaction
- Repay the unreturned capital contributions to Class A investors (since Class A isn’t receiving a profit split, their capital account isn’t reduced)
- Repay the unreturned capital contributions to Class B investors (the amount is either the initial equity investment or the reduced equity investment based on the capital returned from 70% profit splits)
- Make up arrearages in Class A preferred returns (if applicable)
- Make up arrearages in Class B preferred returns (if applicable)
- Cash is distributed to the General Partner until such time as the General Partner has received an amount equal to 30% of the cumulative amount distributed (i.e., total distributions from cash flow, including preferred return and profits)
- Any remaining cash flow is split 70/30, with 70% paid to Class B and 30% paid to Class C
8% Preferred Return + IRR Hurdle
Compensation structure: Class A passive investors receive an annualized 8% preferred return and 70% of the profits up to a 13% IRR. After a 13% IRR is achieved, Class A passive investors receive 50% of the profits. Class B General Partners receive 30% of the profits up to a 13% IRR to Class A. After a 13% IRR to Class A is achieved, Class B receives 50% of the profits.
Waterfall for cash flow
- Cash flow is distributed to Class A until they receive an annualized return of 8% based on their initial capital contribution
- Any remaining cash flow is split 70/30, with 70% paid to Class A and 30% paid to Class B
Waterfall for capital transaction
- Repay the unreturned capital contributions to Class A investors (the amount is either the initial equity investment or the reduced equity investment based on the capital returned from 70% profit splits)
- Make up arrearages in Class A preferred returns (if applicable)
- Cash is distributed to the General Partner until such time as the General Partner has received an amount equal to 30% of the cumulative amount distributed (i.e., total distributions from cash flow, including preferred return and profits)
- Cash is split 70/30, with 70% paid to Class A and 30% to Class B up to a 13% internal rate of return
- Remaining cash is split 50/50 between Class A and Class B
8% Preferred Return + 70/30 Split
Compensation structure: Class A passive investors receive an annualized 8% preferred return and 70% of the profits. Class B General Partners receive 30% of the profits.
Waterfall for cash flow
- Cash flow is distributed to Class A until they receive an annualized return of 8% based on their initial capital contribution
- Any remaining cash flow is split 70/30, with 70% paid to Class A and 30% paid to Class B
Waterfall for capital transaction
- Repay the unreturned capital contributions to Class A investors (the amount is either the initial equity investment or the reduced equity investment based on the capital returned from 70% profit splits)
- Make up arrearages in Class A preferred returns (if applicable)
- Cash is distributed to the General Partner until such time as the General Partner has received an amount equal to 30% of the cumulative amount distributed (i.e., total distributions from cash flow, including preferred return and profits)
- Any remaining cash is split 70/30, with 70% paid to Class A and 30% to Class B
Are you interested in learning more about creating turnkey passive income and generational wealth through multifamily apartment investing? Visit www.syndicationcapital.net for more information, resources, frequently asked investor questions and our free e-book: How to Passively Invest In Multifamily Apartment Syndications.
