This primer on distribution Waterfalls compares the American style versus the Europeans style used in real estate private equity fund structuring.

1. Real Estate
Private Equity
Fund
Structuring
WATERFALL
AMERICAN VS EUROPEAN

2. ¡ A pre-agreed economic arrangement, the waterfall dictates
how distributions are prioritized between a Fund’s general
partner or sponsor (GP) and limited partner or investors (LP)
¡ Depending on the performance of an investment, carried
interest, or profit participation, entitles the GP of a Fund to
receive a share of the Fund’s profit that exceeds the GP’s
pro-rata share based solely on capital invested
¡ Generally speaking, waterfall provisions broadly fall into one
of two categories: European or American
Ploutus Advisors, LLC 1
WATERFALL

3. ¡ GP receives carried interest once capital contributions and
preferred return on realized investments are returned to
investors
¡ A deal-by-deal arrangement where carried interest is
distributed to the GP on successful investments regardless
of losses that may be incurred on subsequent investments
¡ Benefits the GP as investors bear disproportionate share of
risk
¡ Used in Funds where necessary to isolate profits and losses
on an investment-by-investment basis
¡ May be subject to a Clawback – An adjustment payment
made by GP to the Fund for receiving more than its pre-
agreed share of Fund proceeds
Ploutus Advisors, LLC 2
AMERICAN STYLE WATERFALL

4. ¡ GP does not receive any carried interest until all capital
contributions, for both realized and unrealized investments,
plus the full preferred return on aggregate capital
contributions are returned to the investors
¡ Also referred to as a Back-End Loaded carried interest
structure
¡ No interim carried interest paid to GP on deal-by-deal basis
¡ Rebalances risk
Ploutus Advisors, LLC 3
EUROPEAN STYLE WATERFALL

5. Ploutus Advisors, LLC 4
EXAMPLE
Consider two investment projects of $100,000 each. The ratio
of development cap rate to market cap rate determines the
Sale Proceeds from Liquidation.

6. Ploutus Advisors, LLC 5
COMPARISON
Based on the
assumed scenario,
excess distribution
of $1,428 is paid to
the Operating
Partner under the
American Waterfall
versus the European
Waterfall

7. CONTACT
Ploutus Advisors, LLC 6
Disclaimer: The information contained herein may be subject to errors, omissions, changes in assumptions and, other factors. We do not provide
any guarantees, express or implied, and/or make any representations as to the accuracy of the information contained herein. All information
should be independently verified by the user. The analysis represents our interpretation and is NOT intended to replace information received from
tax and/or accounting professionals. The user is advised to conduct its own due diligence and consult with its advisors prior to making any
decision.
To discuss your real estate needs, please contact:
Adnan Tapia
Email: atapia@ploutusadvisors.com
Tel: +1.424.274.3561
Ploutus Advisors, LLC
1875 Century Park East
Suite 700
Century City
CA 90067