What is an American Waterfall Structure in Real Estate?

What is an American Waterfall Structure in Real Estate?

An American Waterfall Structure in real estate investment is a method of distributing returns that typically involves multiple tiers or hurdles, allowing both investors and the general partner (or investment manager) to receive portions of the profits at different stages. This structure is more complex than the European Waterfall Structure, with distributions often starting with a return of capital to investors, followed by a preferred return, and then various levels of profit split based on performance milestones.

The American Waterfall can incentivize the general partner by offering earlier access to carried interest or performance fees after initial investor benchmarks are met, before all investor capital is returned or preferred returns are fully paid. This tiered approach provides a mechanism to reward the general partner for superior performance, with the profit share percentage increasing in favor of the general partner as higher performance thresholds are achieved.