GP/LP
Waterfalls

Capital stack

Typical apartment syndication, $10M all-in:

Debt (agency):       $6,500,000 (65% LTV)
LP equity:           $3,150,000 (90% of equity)
GP co-invest:          $350,000 (10% of equity)
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Total:              $10,000,000

LPs = 90% of equity = ~31.5% of total capital
Alignment: GP has meaningful co-invest

Preferred return

• Typical rate. 7–8% per year. Accrued on unreturned LP capital.
• Cumulative vs non-cumulative. Cumulative: unpaid pref compounds forward (standard). Non-cumulative: pref only for current year (LP- unfriendly).
• Compounding vs simple. Compounding: pref accrues on prior unpaid pref (standard). Simple: pref only on invested capital (LP-unfriendly).
• Paid current vs accrued. Paid current from cashflow distributions. Accrued portion paid at refinance or disposition.

Standard 4-tier waterfall

Tier 1: 100% to LPs until 8% pref paid
Tier 2: 100% to LPs until capital returned (100% of original)
Tier 3: 80% LP / 20% GP until 13% IRR achieved
Tier 4: 70% LP / 30% GP until 18% IRR achieved
Tier 5: 50% LP / 50% GP thereafter

Rough economics at deal-level 18% IRR, 5-year hold, $10M gross profit:
  LP gets: pref + capital + most of tiers 3-4
    ≈ $7.2M total distribution
  GP gets: promote from tiers 3-5
    ≈ $2.8M promote
  LP realized IRR: ~14-15%
  GP economics: 10% co-invest + promote

European vs American waterfall

• European (deal-by-deal). GP earns promote on this deal only after LP receives full capital + pref for this deal. LP-friendly. Single-asset syndications use this.
• American (fund-level). GP earns promote on each deal as distributions occur, with clawback at fund end if overall fund hasn’t hit thresholds. Fund structures use this.

Catch-up provisions

Some waterfalls include GP "catch-up" after LP pref is paid — GP gets 100% of next distributions until GP has caught up to target split. Example:

Tier 1: 100% LP to 8% pref
Tier 2: 100% GP until GP has received 20% of total Tier 1+2 distributions
Tier 3: 80/20 thereafter

Catch-up accelerates GP economics. LP-unfriendly. Watch for this.

Fees

• Acquisition fee. 1–3% of purchase price. Paid to GP at close.
• Asset management fee. 0.5–2% of equity annually. Covers ongoing sponsor work.
• Disposition fee. 0–2% of sale price. Paid at disposition.
• Financing fee. 0.5–1% of loan amount. At origination and at refinance.
• Construction management. 4–6% of hard costs (development/value-add deals).
• Property management. 3–5% of revenue if GP-affiliated PM.
• Refinance fee. 0.5–1% of new loan. Can be additional drag.

Stacked fees can consume 10–15% of investor capital over hold. Model total fee drag, not just promote, when evaluating deals.

LP target returns (2026 market)

• Cash-on-cash: 6–8% annualized during hold
• IRR: 13–16% net to LP on stabilized value-add
• Equity multiple: 1.8–2.2x on 5-year hold
• Preferred return paid current: often 50–70% of pref, balance at exit
• Opportunistic / development: 15–20% IRR, 2.0–2.5x EM, longer hold
• Core stabilized: 10–12% IRR, 1.5–1.7x EM, lower risk

§1061 — 3-year carried interest hold

Tax Cuts and Jobs Act 2017 added §1061. Carried interest (sponsor promote) must come from assets held 3+ years to qualify for long-term capital gains treatment. Under 3 years = ordinary income (up to 37%). Real estate held 5+ years unaffected. Affects flip strategies held short-term; encourages longer holds.

Waterfall due diligence

Before investing LP capital, model:

• At 8% IRR deal-level: how much does LP receive?
• At 12% IRR: how much?
• At 16% IRR: how much?
• At 20% IRR: how much?
• Compare GP take vs LP — is it misaligned at mediocre returns?
• What happens at marginal deal (breakeven)?
• How does promote change after certain hurdles?
• Is there clawback if marginal deal?

Common pitfalls

• Excessive fee stack. 5% acquisition + 2% AM + 2% disposition + 1% financing = 10%+ of capital disappears to fees.
• Non-compounding pref. Simple interest on pref vs compound. 8% simple over 5 years = 40% total. 8% compound = 47%. GP keeps the difference.
• Non-cumulative pref. Pref not paid this year = lost. GP-friendly.
• Catch-up provisions. GP earns 100% until caught up to target split. Accelerates GP economics.
• Sponsor co-invest too low. < 5% co-invest = weak alignment. Target 5–10%+ from GP.
• Refinance fee stacking. Sponsor refinances every 2 years capturing refi fee. LP capital trapped, fees compound.
• GP-affiliated property management. GP earns 4–6% PM fee above market PM costs. Hidden sponsor income.
• Waterfall structured for mediocre deals. Reviewing at 20% IRR, deal looks fair. At 12%, GP still does well; LP doesn’t. Align pref and clawback.