This is not legal, tax, or financial advice. Joint venture structures, splits, and financing terms depend on the specific facts of your deal. Use this page to learn the vocabulary and the tradeoffs, then engage a BC real estate lawyer and accountant to structure or review your agreement.
Deal Structures | Waterfalls
Profit Waterfalls, Preferred Returns, and Promotes
A waterfall is the order in which money flows out of a JV at sale or refinance. The equity split percentage matters less than the waterfall, because the waterfall decides who gets paid first, who gets paid most, and who has to wait.
The Standard Four-Tier Waterfall
Return of Capital
Trigger: First distributions until each partner has received back contributed capital
Split: 100% pro-rata to capital contributors
Protects capital before anyone takes profit
Preferred Return
Trigger: After return of capital, until capital has earned a stated IRR (commonly 8%)
Split: 100% pro-rata to capital contributors
Pays capital a risk-adjusted baseline return
Catch-Up
Trigger: After pref is paid, sponsor 'catches up' on promote
Split: Commonly 50/50 or 100% to sponsor until promote is current
Lets the sponsor / builder reach their share of pref-level profits
Promote / Carry
Trigger: All remaining profit above pref + catch-up
Split: Commonly 70/30 or 80/20 (capital / sponsor)
Aligns the sponsor with upside; the harder the deal, the bigger the promote
Worked Example: $1.2M Profit on a Vancouver 6-Plex
Assume a Vancouver 6-plex JV with $2.0M land, $0.8M capital partner cash, $0.3M sponsor cash, $3.3M senior debt, and $1.2M of profit at sale 24 months later.
Numbers are illustrative. Real waterfalls also have to handle GST, holdbacks, lender fees, and final reconciliation. This is the shape, not a substitute for a tax-advised model.
Best For
- ✓ First-time JV partners trying to model their actual take-home
- ✓ Sponsors testing whether their proposed waterfall is competitive
- ✓ Capital partners pressure-testing what they would actually receive
Usually Fails When
- ✕ You compare equity splits without comparing waterfalls
- ✕ You assume the sponsor's spreadsheet is right without re-modeling
- ✕ The waterfall has no return-of-capital tier
What To Verify Before Spending Money
- → Every tier has a clear trigger, a clear split, and a clear endpoint
- → Pref accrues even if no distributions happen during construction
- → Catch-up percentage is reasonable for the deal size
Questions About Profit Waterfalls
What is a profit waterfall in a multiplex joint venture?
A profit waterfall is the order in which money flows out of a JV at sale or refinance. The equity split percentage matters less than the waterfall, because the waterfall decides who gets paid first, who gets paid the most, and who has to wait for their share.
What is the first tier that gets paid in a standard JV waterfall?
The first tier is return of capital, which pays back each partner's contributed capital before anyone takes any profit. In the worked example, this tier alone accounts for $2,800,000 of the $2.0 million land contribution plus $0.8 million cash, paid back before the preferred return begins.
How does a preferred return work in a multiplex JV waterfall?
After capital is returned, the preferred return tier pays capital contributors a stated rate, commonly 8%, until they have earned that risk-adjusted baseline return. In the worked example, an 8% preferred return on $0.8 million of cash partner equity over 24 months produces $128,000 paid to capital.
What is a catch-up tier and why does the sponsor get one?
A catch-up tier lets the sponsor or builder catch up to the same effective return the capital partner already received through the preferred return, commonly split 50/50 or paid 100% to the sponsor until the promote is current. In the worked example, the sponsor's catch-up also equals $128,000, matching the capital partner's preferred return.
What happens to profit after the preferred return and catch-up are paid?
Once return of capital, the preferred return, and the catch-up are paid, the remaining profit is split according to the promote or carry percentage agreed in the JV agreement. In the worked example, the remaining $944,000 splits 70/30 between capital and sponsor, giving $660,800 to capital and $283,200 to the sponsor.
How much profit did the sponsor take home in the worked JV example?
In the $1.2 million profit example on a Vancouver 6-plex, the sponsor received $128,000 from the catch-up tier plus $283,200 from the final 70/30 split, for a combined $411,200. This is on top of any GC fees the sponsor earned separately during construction.
Why does comparing equity splits without comparing waterfalls fail?
Comparing only the equity split percentage misses that the waterfall determines the order and timing of payouts, not just the final share. The page lists comparing splits without comparing waterfalls as a way a JV negotiation fails, since a smaller percentage paid first can outperform a larger percentage paid last.
What assumptions does the worked $1.2 million profit example use?
The worked example assumes a Vancouver 6-plex JV with $2.0 million in land, $0.8 million in capital partner cash, $0.3 million in sponsor cash, $3.3 million in senior debt, and $1.2 million of profit at sale 24 months later. The page notes these numbers are illustrative and that real waterfalls also have to handle GST, holdbacks, lender fees, and final reconciliation.
Official Sources Referenced
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