Who Gets Paid First? Breaking Down Investor Payouts — With One Simple Picture

“We closed the deal. Now how do we slice the cash so everyone is treated fairly?”

Real-estate “waterfalls” dictate who receives money, in what order, and how much. Three layers appear in most agreements:

• Preferred return (pref) – investors first.
• Catch-up – sponsor evens the score.
• GP promote – everyone shares what’s left.

The Waterfall at 30,000 Feet

Net Cash
▼
Preferred Return
▼
Catch-Up
▼
GP Promote / Split

Cash flows through each bucket top-to-bottom. A bucket must fill before the next one sees a dollar.

1. Preferred Return — Investors First

• What it is: A target (say 8% a year) paid to investors before the sponsor gets paid.
• Why it matters: Rewards backers for putting money at risk.
• Key point: If the project underperforms, investors may still get some or all of their preferred return, while the sponsor could get nothing.

2. Catch-Up — Leveling the Split

• What it is: After investors receive their preferred return, the next dollars flow to the sponsor until the overall split (for example, 70 % investors / 30 % sponsor) evens out.
• Why it matters: Ensures the sponsor isn’t forever behind once the preferred return is met.
• Key point: The catch-up is finite; once parity is reached, cash moves to the final bucket.

3. GP Promote — Sharing What’s Left

• What it is: Remaining cash divides per an agreed split—often 70/30, sometimes tiered (e.g., 80/20 up to a certain return, then 60/40 above it).
• Why it matters: Aligns the sponsor’s upside with project success; higher performance can shift more profit to the sponsor, but only after investors have cleared their hurdles.
• Key point: This layer is the true “profit share.” If there’s little cash after earlier buckets, this slice can be small—or zero.

4. Quick Example (No Spreadsheets Needed)

• Equity raised: $2,000,000
• Pref: 8 %
• Net cash to distribute: $1,000,000
• Preferred return bucket: Investors receive $160,000 (8 % of $2 M).
• Catch-up bucket: Next $68,571 goes to the sponsor so totals balance to 70/30.
• Promote bucket: Remaining $771,429 splits 70/30 → $540,000 to investors, $231,429 to sponsor.

Bottom line: Investors collect $700,000; the sponsor collects $300,000. Everyone can trace each dollar’s path—no mysteries.

60-Second Waterfall Drill

• Draw the three buckets on a notepad.
• Insert your own numbers—raise amount, preferred return rate, desired split.
• Run a sample cash figure through the buckets to see who ends up where.
• Adjust rates or splits if the outcome feels lopsided.

One minute of practice now can prevent confusion and any conflict.

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