Colloquially, this return structure is known as a “waterfall.”īy definition, an equity investment “ waterfall ” is the method used to allocate an investment’s income and profits between the General Partner and the Limited Partner(s). This is done by providing them with an increasing share of the property’s income and profits once certain hurdles are met. The Limited Partnership role is strictly passive and collectively, they contribute the difference between the total equity needed and the amount contributed by the General Partner, usually 80% to 90%.īecause the General Partner is responsible for managing the asset once the purchase is complete, a typical deal structure will incentivize them to deliver a high return to the Limited Partners. The other party is the “Limited Partners” or “LPs.” There may be one LP or many, but they are accredited investors who place their capital with the General Partner in the hope of earning a positive return. In a typical deal, they will put in a small part of the total equity needed to finance the purchase, usually 10% – 20%. They are responsible for identifying investment opportunities, arranging the financing, coordinating transaction logistics, and managing the property once purchased. The “General Partner” is the investment manager. The basic structure of a private equity commercial real estate transaction is such that there are two parties involved, the General Partner and the Limited Partner(s). If you’re an accredited investor, click here to see how FNRP helps you invest in world-class, institutional-quality CRE deals. They are explained below.įirst National Realty Partners helps you diversify your portfolio into commercial real estate backed by high-credit, national tenants. Yet, a proper understanding of them is critical to assessing the risk profile and relative merits of an investment opportunity.

Specifically, there are three commonly used terms – “waterfall”, “clawback”, and “catch-up” – that can be particularly confusing. Investors not familiar with the typical language and deal structure outlined in a PPM may find it difficult to follow. Among other things, the PPM lays out two important aspects of the transaction: (1) the fee(s) paid to the investment manager and (2) how income and profits generated by the underlying property are divided between the investment manager (sometimes called the Sponsor or General Partner) and the individual investors (sometimes referred to as the Limited Partners). Whether allocating money to an investment fund or to an individual deal, the terms and conditions of a private equity real estate investment are governed by a document called the “ Private Placement Memorandum ” or “PPM” for short.

Waterfall rules