From the course: Real Estate Deal Structuring: Introduction to the Waterfall Framework
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Three-tier waterfall
From the course: Real Estate Deal Structuring: Introduction to the Waterfall Framework
Three-tier waterfall
- All right we're now going to look at the three-tier waterfall framework. So everything looks essentially the same. What we have here is this secondary hurdle, before the final split. Now for purposes of comparing the different frameworks later, we're going to keep the preferred return at 8% and then the final split the same as the two-tier at 65/35. What's different now in the three-tier is this middle tier here. So usually for a three-tier, what we have is a split where it is just a slight incentive, it's kind of like a middle ground before the project manager really gets a significant incentive, right. So in the two-tier, it's like, well, if you beat the 8% preferred return, then you get this huge bonus. This is the reason why three-tier structures are sometimes more common, especially for projects that are involving multiple parties. The reason for that is it gives the project the ability to kind of stagger the incentive. So here, Albert, beating the 8% preferred return, while…
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