Tilden Moschetti: How do
waterfalls work in a

syndication? Well, that's what
we're going to be talking about

right now. My name is Tilden
Moschetti, I am a syndication

attorney with the Moschetti
syndication Law Group.

You may be wondering to yourself
exactly how our distributions

going to happen, what are these
things called waterfalls that I

hear about how to what our
preferred returns? How does it

all fit together? That's what
we're going to be talking about

right now. So let's go to our
whiteboard. And take a look at

what of just a very simple
scenario so that we can be

better understood. So let's say
we have a property that we

bought for $5 million. All cash.
And we raised that $5 million

entirely from investors just for
the ease of doing the analysis.

And out of that $5 million, so
it pays rents, right? That's how

most properties happen. They,
they pay rents, and then there's

some sort of appreciation that
gets distributed at the end. So

let's say we've told our
investors hey, look, investor,

we're gonna give you this deal,
we're gonna give you a preferred

return offer, also called a
pref, of 7%. And then any money

that comes after that preferred
above that preferred return of

7%, we are going to split
7030 70%, to you, investor, and

30%, to me as the syndicator. So
then, let's, let's look at it

from the investor's point of
view, and the sponsors. So let's

say that those rents are being
collected. And let's say it's

about let we're getting, say
55 $550,000 annually on that

investment, so $550,000. So
first, we take that $550,000,

and we need to give that
preferred return this pref to

the investors first, that's the
first thing that happens on all

those cash flows. So they first
get 7% 7%. Right, which equals

$350,000. out why $350,000?
Well, it's $505 million, that we

paid for it 7% of 5 million is
$350,000. So that is their

annual preferred return amount
that they're getting. On top of

that, there's still this bought
this amount of money, this

$200,000. Right, so the 550
minus the 350 K is $200,000,

that still needs to be divided
between investors and the

sponsors. So that 350k, the
split is 7030. And so they get

another 140k, right 70% Of
$200,000 goes to that goes to

the body of the investors. Now
the sponsor, they get 30% of

that 200,000 that's leftover so
they get 60,000. So out of that

those cash flows in you as a
sponsor getting $60,000 Every

year, this is after fees have
already been taken account, the

investor is getting 350 plus
140. So they're getting $490,000

paid out to them every year. So
as part of their investment, so

pretty good deal. That's that's
a nice return. So you've decided

to sell the property. Let's say
you sell it in year five. So

year five, you are able to sell
the property and let's use

$6,500,000 Is your sales price.
Alright, so first, how do we

divide up that amount of money?
So first we have to return so to

investors We have to give them
their principal. How much they

initially gave you that was 5
million remember? After the

payment of their principal, we
then need to get paid them the

preferred return, as I bet
you're thinking, well, actually,

we don't. So let's say that sale
is paid at the end of year five,

and we've been paying regularly,
those preferred returns at that

7%. So the end of year on
December 31, in the year, in

year five, that preferred return
has already been paid that 7%

has already been paid. So now
there's just the division of the

assets that are remaining. So
that is leaves us with with, we

have to return their capital. So
we then have $150,000, to

divide, I'm sorry, $1.5 million
to divide between the investor

and the sponsor. And so 70% of
that return is belongs to the to

the investor. And that is 105,
or 1,000,500, I'm sorry,

1,050,000. gets paid out to
them. And then the remaining

$450,000 gets paid out to the
sponsor. So that's your money to

get there. So now they investor
then gets this $6,050,000 At the

end of the investment. So is it
just the is that just the the

total amount? So how do we with
that amount? How do we figure

out what the internal rate of
return is? So for this, you're

gonna need a calculator. And we
draw what's called a T bar, a T

bar says we start at time zero,
where they paid out $5 million.

Right. And then we held that for
one year, one year, two year

three year flips to choose your
three, year four and year five.

And remember, in those, we were
making payments of $490,000.

In here, I'm going to write it
off to the side because I'm

going to total it underneath.
Plus, then we also have this

payment of the 6,050,000. Right,
and so that total is six 540.

Oh, so let's just delete this.
So it's easier to read. Right?

So that 6,000,500 Now what you
do is you select this entire

range, you put it in Excel, it
tells you what the answer is,

it's been a 13% annualized
return that the investor has

gotten so not bad. So the IRR is
13%. Hope that explains a little

bit on how you do these
waterfalls. And you do those

preferred return payments and
you split out the cash for

typically in a real estate
investment but really any kind

of syndication. This is how
those the water, the water

flows. So if I can be of any
assistance to you, my name is

Tilden Moschetti. I'm a
syndication attorney with these

Moschetti syndication Law Group.
We specialize in Regulation D

Rule 506b and 506c syndications
and funds