How Are You Structuring Your Multifamily Waterfalls?

Question

I’ve been upgrading the waterfall section in my large multifamily underwriting model and focused on something I don’t see handled well in a lot of template models - flexibility.

Right now it can handle:

• Any simple equity split
• Separate GP co-invest vs ownership (e.g. GP invests 5% but earns 10% ownership)
• Preferred return structures in a true pari passu format
• Promote splits above the pref
• Fully dynamic LP / GP cash flow breakdown tied to refinance + exit

No hard-coded 70/30. No rigid assumptions. Just clean inputs that drive everything downstream.

I’m curious how others here are modeling their deals:

Are you keeping it simple?

Using pref + promote?

Going more in-depth with multiple tiers of IRR hurdles?

I build high-level, operator-grade multifamily models and am always refining them based on real-world deal structures. If anyone wants to compare approaches or see how this one is structured, feel free to reach out.

Evan Polaski · Answer

@Gabe GoudreauAsset management fees are always below the line items.  They are not part of NOI, nor even property level cash flows.  They are partnership level and should be handled as such.

What Chris, I believe, is saying, is a quick toggle to accrue fees until adequate cash is available AND return of capital has occured, sort of like a GP catch-up.

At the end of the day though, I cannot speak to what your goal is, but there are a thousand possible waterfalls and capital stack structures. Beyond the waterfall, does your model allow for multiple debt/pref equity tranches? Refi scenario testing? Common assumption sensitivity tables? Class A/B/C share classes, sometimes with varying priorities and sometimes pari passu with different prefs/hurdles, etc.

Again, not sure what feedback you are looking for, and what you have is a good start, but these can become so much more complicated, if you start offering up every option to everyone.

Gabe Goudreau · Answer

That's what I thought was most common practice with AM fees, I have seen a few offerings where it was above the line and that always puzzled me.

I see what you mean about GP catch-ups, that makes more sense than just eliminating them all together while keeping the focus on performance. The goal of this model is not to capture every institutional capital stack permutation, but to create something dynamic enough to underwrite multifamily deals quickly and efficiently from OM to offer, and to stress test assumptions as the deal evolves. Returns, refinance scenarios, and equity splits update automatically as inputs change. Right now, it is built around a relatively straightforward debt and equity structure, either full LTC or acquisition only financing, with refinance testing included. Thank you very much for the feedback Evan, I appreciate it.

Chris Seveney · Answer

Start with the fees. Eliminate fees or put them in the back end of the deal after investors get paid and you will grab a lot more attention

Gabe Goudreau · Answer

Great idea on shifting the fee structure, Chris - I'd personally rather have a more favorable equity position than steep fees. I’ve been building out a fee section in the model as well so it’s fully transparent. Do you think moving asset management fees to a below the line expense would satisfy this? Or would you say eliminating them entirely is better?

Greg Scott · Answer

Personally, I'm not a fan of waterfalls because it creates a major misalignment of incentives between the syndicator and the limited partner.  I've never invested in one.  I never offered one as an investment.  I prefer a straight profit split.

Of course, those are easy to model. Those are easy for investors to understand.  In a dispute, those are easy for a lawyer or arbiter to understand.  (Fortunately, I've never been in a dispute, but I know some syndicators with waterfalls have been.)

Gabe Goudreau · Answer

Thanks for the feedback, Greg. Your comment on one of my previous posts about partnership structures actually stuck with me - especially around simplicity and alignment. That’s part of why I built this feature into the model to handle both straightforward profit splits and more advanced waterfall structures (or neither, if someone prefers to keep it clean). When you say misalignment of incentives are you thinking primarily about promote-heavy structures where the GP is incentivized to push risk to hit hurdles? Or something else you’ve seen in practice?

How Are You Structuring Your Multifamily Waterfalls?

Most Popular Reply