Equity Waterfall Structure

An equity waterfall structure is a type of investment structure that is commonly used in real estate. In an equity waterfall, the returns on an investment are distributed to the investors in a specific order, with the most senior investors receiving their share of the returns first, followed by the junior investors.

The idea behind an equity waterfall structure is to align the interests of the various investors in the project, and to ensure that the returns are distributed in a fair and equitable manner. The specific terms of an equity waterfall structure will vary depending on the specific details of the investment, but typically the most senior investors will receive a preferred return on their investment before the junior investors receive any returns.

For example, in a real estate equity waterfall, the most senior investors (such as the sponsors of the project) may receive a preferred return of 8% per year on their investment before the junior investors receive any returns. After the senior investors have received their preferred return, the remaining returns on the investment may be distributed to the junior investors according to a pre-determined formula, such as a 50/50 split between the senior and junior investors.

Overall, an equity waterfall structure is a way of managing the returns on a real estate investment in a way that is fair and transparent to all investors. It is a key tool for managing the complex relationships between investors in a real estate project.