A Plain-English Guide to the Waterfall

The distribution waterfall is where the money is decided, and it is written in language designed to intimidate. Strip the jargon and it is just a set of priority rules for who gets paid in what order.

Return of Capital, Pref, Promote

First, investors get their money back. Then they earn a preferred return — a hurdle, often around 8%. Only after both does the sponsor share in the upside through the promote. That sequence is the whole game.

If you understand those three tiers, you can read 90% of real estate deals. The exotic structures are just variations on this spine.