Simple 3-Tier Waterfall Model

Waterfall models in real estate projects are one of the most difficult concepts to understand. Cash flow from a development or investment project can be split in a countless number of ways. A waterfall is a method of splitting profits among partners in a transaction that allows for profits to follow an uneven distribution. The waterfall structure can be thought of as a series of pools that fill up with cash flow and then once full, spill over all excess cash flow into additional pools.

This Excel model contains 2 types of waterfall methods: the first Waterfall distributes profits based on a pro rata basis between the investor and the sponsor, effectively sharing the risk between the two.

The second one distributes profits first to investors until they get back their capital and preferred returns, and then starts distributing profits to the sponsor, effectively minimizing the risk to the investor, and increasing the risk to the sponsor.