Advanced Waterfall Structures in Real Estate Partnerships

Eric Wilson


June 26, 2023

5 min read

Eric Wilson


June 26, 2023

5 min read

The concept of "waterfalls" plays an essential role in determining how profits from a project are distributed among partners. The structure of these waterfalls can significantly impact the returns of all parties involved. While we prefer to set up simple structures that everyone understands at Freedom Venture, it's important to understand the intricacies of advanced waterfall structures and discuss their application in different types of real estate partnerships, such as syndications and funds.

Understanding Waterfall Structures

Waterfall structures refer to the tiered system through which real estate profits are distributed among partners. The higher tiers (closer to the source of the waterfall) are usually prioritized and must be fulfilled before proceeds trickle down to the lower tiers.

Two common structures are:

  1. European Waterfall (Single Waterfall): In this structure, the return of the initial investment (i.e., return of capital) occurs before any profits are split among partners. It's a more conservative structure and typically favors the limited partners or passive investors.
  2. American Waterfall (Double Waterfall): This structure splits profits before the complete return of the initial investment. It introduces an additional distribution tier, typically favoring the general partner or active investor, as they start receiving profits earlier in the project.

The Role of Waterfall Structures in Syndications and Funds

The choice of waterfall structure can depend heavily on the type of real estate partnership involved, be it syndications or funds.


In syndications, a group of investors pool their resources to invest in a single property or project, led by a syndicator (the general partner).

Waterfall structures in syndications typically involve multiple tiers. Initially, returns go towards returning capital contributions and a predetermined preferred return to the limited partners. Any remaining profits are then split between the general and limited partners based on an agreed-upon percentage (e.g., 70% to limited partners, 30% to the general partner).

In more advanced waterfall structures, the profit-sharing ratio may further change as higher profit thresholds (hurdles) are met, increasing the general partner's share for higher project performance.

Real Estate Funds

In contrast, a real estate fund is a pooled investment vehicle where capital is used to invest in multiple properties. The fund is managed by a fund manager who takes on a role similar to a general partner in a syndication.

Waterfall structures in funds can be more complex due to the nature of the investment. For example, the fund might use a deal-by-deal waterfall (akin to the American Waterfall), where profits from each property are distributed as they're realized. Alternatively, they might employ a whole-of-fund waterfall (resembling the European Waterfall), where profits aren't distributed until all the fund's investments have been liquidated and the initial capital returned to investors.

It's also common for funds to incorporate catch-up provisions, where, after meeting the preferred return, the fund manager receives a larger share of profits until a certain balance is reached.


Whether you're a general partner or limited partner, understanding the nuances of waterfall structures can significantly impact your investment returns. Advanced waterfall structures add another layer of complexity and potential profitability but can also introduce additional risk.

It's crucial to carefully review these structures in your partnership agreement or fund documentation. And always remember: the nature of the real estate partnership—be it a syndication or fund—will play a vital role in determining which waterfall structure is used, shaping the flow of returns between all parties involved.