Pref return, catch-up, and promote distribution tiers
A real estate syndication pools capital from limited partners (LPs) and pairs it with a general partner (GP) who operates the asset. Profits flow through a waterfall: first, LPs receive a preferred return (typically 8%), annual cash from operations. Once that is satisfied, a catch-up period begins where the GP captures distributions until they reach an agreed promote (often 20-30% of remaining upside), then any remaining profit splits according to the final deal structure (usually 20% GP, 80% LP, or 30/70). This ordering aligns GP effort with LP capital at each stage.
Alignment and the time-value of capital
The waterfall structure incentivizes the GP to hit cash flow targets (satisfying the pref return) first, then to accelerate the sale and exit (maximizing total return for the catch-up). An LP investing 100,000 at 8% pref return receives 8,000 annually before any upside sharing. If the deal underperforms and never pays the full pref, the LP absorbs a loss; the GP, operating on sweat equity, also loses, but has minimal capital at risk. This shared downside loss is the engine of alignment.