What is a European Waterfall Structure in Real Estate?

What is a European Waterfall Structure in Real Estate?

A European Waterfall Structure in real estate investment refers to a specific method of distributing returns among investors and the investment manager or general partner. This structure prioritizes the return of capital to investors before any profits are split according to predetermined percentages. Unlike the American Waterfall Structure, which typically involves multiple tiers of distribution that can allow managers to receive carried interest or performance fees at various stages, the European model is more linear and investor-friendly.

In the European Waterfall, all capital contributions and preferred returns (if applicable) are returned to the limited partners or investors first. Only after these obligations are met do the profits begin to be shared, often initially at a higher percentage to the investors, with the general partner receiving a carried interest only after specific return benchmarks are achieved. This structure is designed to align the interests of the general partner with those of the investors, emphasizing the priority of returning the investors' capital and preferred return before the general partner can participate in the profits.

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