Waterfall Promote Splits

Waterfall promote splits refer to the division of profits in a real estate investment or joint venture where the distributions change as certain return milestones (often IRR hurdles) are met. This mechanism is known as a "waterfall structure," which is a key component of many partnership agreements in real estate investment.

Here's a simplified example of how it might work:

Return of Capital: The first step in the waterfall structure is usually to return the initial capital contribution to the investors. This means that before any profits are divided, all investors receive their initial investment back.

Preferred Return: Once the capital is returned, the next tier might be a preferred return. This is a predetermined rate of return that investors are entitled to receive before the general partner gets any profit. The rate is usually expressed as an annual percentage yield (e.g., 8% per year).

Promote Splits: After the preferred return, the additional profits are usually split between the limited partners and the general partner according to a predetermined percentage. These splits are also known as "promotes." For example, the next tier might be a 70/30 split (70% to limited partners, 30% to the general partner). This continues until a certain IRR hurdle is met.

Further Promote Splits: After each IRR hurdle is met, the profit split might change. For instance, after achieving a 15% IRR, the profit split might change to 60/40, and after a 20% IRR, it might change to 50/50.

In summary, the waterfall promote splits are a way of sharing profits between the investors and the fund manager (or general partner). They are designed to incentivize the fund manager to maximize the investment's return, as they receive a larger share of the profits as the performance of the investment improves. The exact terms can vary greatly depending on the specific partnership agreement.