Waterfall & Promote Structures: How GPs and LPs Actually Get Paid
The distribution waterfall is the contractual machinery that decides who gets what in a CRE syndication. Understanding it is the difference between underwriting a deal as an LP and underwriting it as a fee-paying minority partner.
The Standard Waterfall
A typical single-asset CRE waterfall pays in this order:
- Preferred return to LPs — typically 7–9% annualized on unreturned capital
- Return of LP capital — until 100% of LP equity is returned
- Catch-up (optional) — GP receives 100% of distributions until promote ratio is achieved
- Profit split (promoted) — typically 80/20 LP/GP above pref, scaling higher with IRR hurdles
What the Promote Is For
The GP's promote is compensation for sourcing the deal, signing the loan personally, operating the asset, and bearing the reputational risk of execution. A 20% promote above an 8% LP pref means: LPs get all of the first 8% of return on their capital, and the GP gets 20% of everything above that. The math compounds quickly on a strong deal.
Tiered Hurdles
Most institutional waterfalls layer additional IRR hurdles to align incentives more aggressively at higher performance levels. A common structure:
- To 12% IRR: 80% LP / 20% GP above pref
- 12% – 18% IRR: 70% LP / 30% GP
- Above 18% IRR: 50% LP / 50% GP
The tiered structure ensures that the GP captures meaningful upside only when the deal materially outperforms, while LPs get protection on the downside via the pref.
European vs. American Waterfalls
In a European waterfall, the GP receives no promote until all LP capital and pref have been returned across the entire fund. In an American waterfall, the GP receives promote on a deal-by-deal basis, with a clawback at fund termination if cumulative LP returns fall short. Single-asset CRE deals almost always use a deal-by-deal structure; institutional funds vary.
What LPs Should Negotiate
- Pref rate — the floor on LP return before any promote
- Cumulative vs. non-cumulative pref — cumulative compounds unpaid pref into future periods
- Catch-up — whether GP gets accelerated distributions after pref/ROC
- IRR hurdles — the levels at which GP share increases
- Clawback — protection against GP overdistribution in early periods
- Acquisition, asset management, and disposition fees — these come off the top and reduce LP return before pref
Underwriting a Sponsor's Waterfall
Linton Global Solutions advises LPs evaluating Florida CRE syndications — reading the waterfall carefully and modeling LP IRR under realistic vs. sponsor-pro-forma outcomes.
Schedule LP Review →Frequently Asked Questions
What is a distribution waterfall?
A distribution waterfall is the contractual sequence by which cash flow and capital proceeds are allocated between limited partners (LPs) and the general partner (GP) in a real estate syndication or fund. It typically pays a preferred return to LPs first, returns capital, and then splits remaining profit on a promoted basis to the GP.
What is a promote?
A promote is the disproportionate share of profit a sponsor (GP) receives once LPs have hit their preferred return and capital-return thresholds. A common structure pays GP 20% of profit above an 8% LP pref, scaling to 30% or more above higher IRR hurdles. The promote is the GP's compensation for sourcing, operating, and risking signature on the deal.
How does a tiered waterfall work?
A tiered waterfall pays one promote split until an IRR hurdle is reached, then a higher split above that hurdle. Example: 80/20 to 12% LP IRR, 70/30 to 18% IRR, 50/50 above 18%. As performance improves, the GP captures a larger share of marginal profit.
What is a catch-up provision?
A catch-up provision lets the GP receive 100% of distributions after LPs are paid pref and return-of-capital, until the GP has received its agreed-upon proportional share. After catch-up, distributions follow the standard split. It is most common in fund structures, less so in single-asset deals.