The AAA Storage Podcast

In this episode, Paul Bennett demystifies the mechanics of investment waterfalls—how profits and returns are distributed between investors and sponsors. He explores the critical differences between American and European waterfall structures, why sponsor alignment and fee transparency matter, and how AAA Storage’s approach protects investor interests. Whether you’re new to private equity or looking to sharpen your due diligence skills, you’ll take away practical insights for evaluating real estate investment opportunities with confidence.

Chapters
(00:00) Understanding the Waterfall Structure
(01:26) Legal Governance and Transparency
(03:36) Incentives and Sponsor Alignment
(06:02) American vs European Waterfalls
(09:49) Distribution Priority and Capital Return
(12:47) Preferred Return and Split Rationale
(17:14) Simplicity vs Complexity in Waterfalls
(20:09) Fee Structure and Sponsor Profitability
(23:59) Complex Tiered Waterfall Examples
(27:41) Due Diligence and Fairness for Investors

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Creators and Guests

Host
Paul Bennett
Managing Director at AAA Storage

What is The AAA Storage Podcast?

Investing in self storage gives you the fundamentals and growth you need to grow your portfolio. But skip the opportunities from golf buddies and gurus—invest in a real track record. Started by John Muhich in 1993, AAA Storage has delivered 19% IRR across 90 deals, totaling $450M in exits. Listen to our expert insights on investing from the AAA Storage team. See more at aaastorageinvestments.com.

Welcome to the AAA storage podcast,
your integrated real estate and

development partner, exploring all
things, self storage investing to

bring you diversified success.

Let's dive in.

Brandon Giella: Today we are
talking about waterfalls Paul,

managing director of AAA storage.

What is a waterfall?

Why?

Why the heck is it called a waterfall,
and why should anybody care?

Paul Bennett: Yeah, well, you
know, waterfalls are basically the

governance around how distributions.

Are, are made from partnerships or LLCs.

Um, and interestingly enough, Brandon,
the name, if, if you can get this

visual, we don't have a visual to
show you, but if you can imagine a

series of buckets that are stacked,
um, sort of offset from each other.

Um, if you start pouring water
in the top bucket, once it gets

completely full, the water spills
out and goes into the second bucket.

And as

Brandon Giella: Like one
of those champagne tables,

Paul Bennett: exactly.

So, and, and, and, and so when the
second bucket gets full, then the

water that's coming outta the first
bucket and the second bucket starts

running over into the third bucket.

And that's essentially
how the waterfall works.

You start filling, you set the
priority of which buckets get

filled first, and, and then.

What order they get filled in and,
and, and how big those buckets are.

So that's where the name comes from.

I don't know that that has a ton of
value, but I think sometimes it's always

fun to kind of know the origination
of, of how something, uh, gets filled.

But essentially, uh.

They are the rules and, and, uh, I
think probably most people are familiar

from looking at them in the private
placement memorandum, which is, they're

generally described in the private
placement memorandum, but it's actually

part of the governance structure.

So the real detail on a water, on a
waterfall and how it works, uh, is

actually found in the limited liability.

Uh, company agreement or the LLCA,
um, or whatever the, uh, governing

documents are for the entity.

If it's a limited partnership, it would
be a limited partnership agreement.

But the governing docs, in fact,
uh, for example in in growth fund

2 uh, the, the description of
distributions and the waterfall can

be found in section six of the LLCA.

Um, and that is the legal.

Governance, very detailed
language that it actually governs.

What you see in the PPM is simply
sort of overview, a description.

It's adequate enough to understand it,
but, um, and, and why it matters is

it's, it's, um, it's essentially, and,
and every investor should, and I think

most do look at the waterfall structure
if they're considering making an

investment to, so that they understand.

The priority of those distributions.

What share is the sponsor getting
and when is he getting it, and does

that feel fair and right to them
given this particular investment?

Um, the, the waterfall is there, um,
to protect investors, but also to

act as the incentive compensation
mechanism for the sponsor.

Um, and, uh, and, and certainly.

As an investor, if the deal is really
heavily feed upfront and the sponsors

appears to be making a profit on the
front end, you would expect the back

end, the waterfall to be a little
more generous to the investors.

Um, if the sponsor defers any real
benefit at the beginning or early

in the, in the investments life
and is predominantly dependent on.

Um, the success of the investment and the
waterfall, um, that's usually a positive

for most investors in most situations, and
you would expect the, the sponsor to have

a little, maybe a little larger share.

Um, when we'll talk about our waterfall
in detail in here in just a minute, but

essentially the last step in our waterfall
is a 70 30 split with 70% going to the

investors and 30% to us as a sponsor.

Um, and so I think the proper
way to view that is we're 70

30 partners with our investors.

Um, and, and our opportunity to benefit
is basically after other priority

distributions are made, the, the profits
after those distributions are split 70 30.

So.

Brandon Giella: Mm.

That's helpful, uh, for those listening.

Um.

There's gonna be some terms
I'm sure we'll throw around.

And we've also talked about how important
it is that the sponsor has some skin

in the game with their investors
to see the long-term success of the

investment, like you just mentioned.

So check out AAA storage investments.com.

Go to the insights tab.

You'll see tons of other resources
and conversations we've had around

some of these structures, but it's
important to get the details right.

Paul Bennett: And just to point
out, I'm talking about for the

sponsor in this case, AAA storage.

Um, our 30% backend carried
interest is how it's referred to.

It's a carried interest, um, because
there's no direct investment, um, by us,

that's required for us to get that 30%.

It's basically a performance
bonus, if you will, however.

Just to be perfectly clear, we'll have
$10 million of our own capital invested

as an investor in growth fund two,
subject to that same waterfall and all

the other costs that the funding occurs,
which is really a whole different,

that's our skin in the game, right?

Um, $10 million of our own cash
invested side by side, under exactly

the same terms with our investors.

Um, that's our skin in the game.

The, the 30% carried interest that we
get, um, is, is really our incentive comp

as the, the manager of the investment
to do a great job for our investors.

Brandon Giella: No, that's great.

Okay.

Thank you for clarifying.

That's helpful.

Okay, so what else?

What else is helpful to
know about a waterfall?

Thinking about these investors
and, and why I would want to be.

Uh, not careful, but you mentioned,
you know, is this fair and right.

When I'm reviewing a deal, looking at
a sponsor and their relationship to the

deal, talk to me about why that, you
know, what's, what's going on there?

What I should be paying attention to.

Paul Bennett: Yeah.

First of all, there are two
types of waterfalls, essentially,

the American waterfall.

Um, the, the rules in terms of
the governance, in terms of the

distribution is applied on an an,
an investment by investment basis.

So if you're in a single asset investment,
you're a part of an LLC, uh, you're

an investor, uh, that has acquired
a, an existing multi-family project.

Um.

The, the American waterfall or the
European waterfall, which is the

other type, are really applicable.

'cause there's only one asset, right?

So, uh, the American is, is on an
investment by investment basis.

The European waterfall is applied at the
end or the liquidation of the partnership.

So if you're in a single asset
deal, either one apply and

they function exactly the same.

If you're in a multi-asset.

Investment like our growth fund two.

The difference is, and we are an American
waterfall, is that we distribute the

cash subject to the waterfall on an
individual investment by investment

basis when those investments are sold.

If we were a European structure,
that would be no distributions

until everything is sold.

Brandon Giella: Yeah.

Paul Bennett: Or if there were the
investors would get a complete return

of all of their capital invested
in the fund, not just the capital

invested in that one project.

Before it went to the second
step of the waterfall.

So one of the advantages, um, from
a sponsor standpoint, um, of an

American waterfall is that we actually
have the opportunity to earn some

of our carried interest in each,
from each property as it's sold.

Um, and, and, uh, we think that's fair.

Um, our.

Our management performance, um, really
exists at two levels on a project by

project or property by property basis, as
well as overall at the entire fund level.

So we use the American waterfall.

Uh, it does allow us to distribute cash
at each exit and it allows us to, um.

Uh, to benefit as the sponsor, but what
we do at the back end, because in concept

the American waterfall could have the, um,
the risk of overcompensating the sponsor,

you have one project that goes really,
really great and the GP gets a chunk

of big chunk of, of carried interest.

The next project doesn't go well at all.

And, and the GC or the, the GP does
it, you know, it gets a very small,

uh, carried interest, but at the
end of the day, if you add up what

they should have gotten from both.

Combined, they wound up
getting more than they should.

Um, and so we have a claw back in our
waterfall, which is when the last property

is sold and the fund is liquidated.

The calculation is done to make sure that
our compensation never exceeded 30% of

the entire portfolios carried interest.

And if it did, then we have
to put money back in the fund.

That goes back to the investors.

So the clawback is a common feature,
um, in the American waterfall that

makes sure it doesn't create any
disproportionate advantage for the,

for the sponsor in, in the investment.

I think the other thing that people
don't know, and I, I'm kind of wandering

off here, but it it, I had made a note
and I forgot to mention earlier, is

that the waterfall actually applies to
every dollar of any kind distributed

from the investment to the investors.

Um, I think people think of it as
being applied when the asset is

sold, but let's just take an example.

Let's say you invest in an a, a, a
partnership that's buying and has bought

an existing multi-family property,
and you're getting a 10% cash on

cash return on an annual basis, and
the property is held for 10 years.

Every dime of those
operating distributions.

Would go to you as the investor,

and it wouldn't be until the 11th year
where any of that money was allocated

within the waterfall to the next step,
whatever it is in the waterfall, because

these are operating distributions.

They're not treated on your K one as
return of capital, but the waterfalls,

the way they're written is it says the
investors must receive an amount equal to.

Their invested capital,

a hundred percent of all distributions
go to the investors until they receive an

amount equal to 100% of their, or they get
a complete return of capital and then it

goes to the second step in the waterfall.

So it can be confusing 'cause
people say, well, wait a minute,

that's not return of capital.

That's actually an operating distribution.

It is.

But for purposes of calculating.

The dollars that move through the
waterfall and the priority that they're

given every first dollar out is,
is dumped in that return of capital

bucket until it's full and overflows
to the next bucket, which would be,

in most cases, a preferred return.

And then that bucket fills up whether it's
from sale proceeds, refinance proceeds.

Um, operating distributions
and when it then any additional

dollars go to the third bucket.

Um, and, and so I think that's, I don't
know that it's key to understand, but

the, the every dollar that's distributed,
no matter, the source that comes out of

a a, an investment vehicle is generally
subject to the provisions of the waterfall

in terms of the priority that's set in
terms of, you know, the amounts of money

that people, that the investors get back.

Brandon Giella: Okay.

Just to emphasize the point, I'm gonna
try to answer my own question, but

from the perspective of the investor.

Listening to what you just said,
this matters helps me as the investor

because I know I'm an and every,
every investment carries risk.

The future is uncertain, but I, I can
be assured by the governance policies of

this investment that I should get my money
back before the sponsor gets their money.

And then we talk about

Paul Bennett: gets a
in, in most waterfalls.

Brandon Giella: Yeah.

Yeah, yeah, yeah, yeah.

Paul Bennett: I, I, I'll use ours.

Brandon Giella: feel like
there's an assurance that I'm,

this is a good thing for me.

Paul Bennett: And in, in today's
world, there's actually a second.

The second step in the waterfall
is generally preferred return.

Um, I'll use ours as an example.

The first step in our
waterfall is complete return

of capital to the investors.

The second step in the waterfall is a 7%
annual preferred return from the date.

You invested the capital to the
date it's being returned to you.

Um, and then, and only then in
the third step of the waterfall

does the sponsor get anything.

So essentially that structure guarantees
you that you're gonna get your

money back plus a 7% annual return
before the sponsor ever gets a dime.

Brandon Giella: Okay.

Two questions there.

One, I, I've heard, you know,
pref the preferred return.

That's an important.

Thing in this relationship.

Why?

And two, uh, why 7% or how do
you guys think about, why is

that a, a good number to, to

Paul Bennett: It is, it is generally
in the, in the, in the six to 8% range.

In a, in, in, in a average waterfall.

There are investments.

Where the capital is being deployed
as a preferred, um, tranche

in the capital stack, and it's
really the only source of return.

And in that case, the numbers
would look different in the

waterfall for the, for the entity
making that preferred investment.

But within the structure where
you're really talking about the

equity, an equity investment.

Um, the first step is
generally return to capital.

The second is a preferred return.

It's sort of marked to the market.

Um, Brandon, it, you know, if
interest rates today were at 12%,

then pref returns would have to
be higher for investors, right?

They'd have to get, you know,
they'd have to get that 11, 12%

return, um, as a preferred return
before the sponsor got anything.

But in today's market, somewhere
in that six to eight range.

Um, it's pretty typical.

Um, and we set ours at seven.

Uh, uh, it's, there's no perfect, you
know, reason or justification for it.

We just felt like that was fair.

But if you think about it, let's say
you make an investment and it sold

four years later when it's sold,
the first thing you're gonna get

back is the amount you invested.

And the second thing you're gonna
get back is 28% of the amount you

invested, or 7% a year for four years.

Brandon Giella: Yeah.

Paul Bennett: Um, if it was exactly
four years and, and then the next

step in our waterfall, and in most
waterfalls, this is fairly common.

If you remember the very beginning,
I talked about us being a 70

30 partner with the investors.

Brandon Giella: Mm-hmm.

Paul Bennett: So the next step in
the waterfall is the sponsor gets a

chance to catch up to the investors.

Um, based on the amount of
pref that was preferred return

that was paid to the investors.

So in our waterfall, the third step,
first step is return to capital.

Second step is a 7% annual preferred.

The third step is that we get a
distribution equal to 30% of the preferred

return that was paid to investors.

So they get it first.

If there's no more there, we get nothing.

So it's really downside protection.

The worst our investors can
do is all their money back.

Well,

we're not gonna see a dime until
they get all their money back.

Plus their 7% annual return.

I wanna say it the right way.

So it's downside protection for them.

Um, once they get that return, return
of capital, plus a 7% preferred return.

Annually, we get to catch up.

We get 30% of the amount they were
paid in pref, and now we're at parody.

And every dollar after that, the fourth
bucket with the other three are full and

have overflowed in the one below them.

Uh, the last bucket is a
straight 70 30 per uh, split.

Brandon Giella: Hmm,
that's the last bucket.

So there's four buckets.

If, if we're looking at the Champagne
Tower of Champagne coming at the top and

it's flowing to all, there's four layers.

Yeah.

Paul Bennett: In, in our
waterfall there are four layers.

There are structures that, that
have more than four layers.

Um, but we chose to keep our simple.

Um, we chose the, the, the
splits are anywhere from.

Um, you know, in a very simplistic
model, anywhere from 60 40 to 80

20, um, in that last step in the
waterfall, there are more complicated

waterfalls that have return hurdles.

In them, and I'll give through an
example maybe in a second where the

GP can even get to the point where
the sponsor can even get to the point

where they're getting half of every
dollar that comes out beyond a certain

return to their investors or more.

Um, we chose a very simplistic
four step waterfall.

The last step being 70 30 for a couple
reasons, one for a sponsor with our

experience and our track record.

Um, it's very, um,
standard in the industry.

Um, again, if you're a brand new
sponsor without a track record, uh,

represents, you know, more risk, more
concern on the part of investors, you

might do an 80 20 split on the back end
'cause you haven't earned the right.

Um, it, you know, uh.

It, it's sort of based on
experiences like hiring an employee.

If you hire somebody without a lot
of experience, you probably get

'em a little bit less expensively.

Our investors are hiring us to manage
this investment for us, for them,

and, and our track record and our
experience justifies a 30% backend.

Um, the other reason we chose 30% is that
we think our track record is important.

Um, and every deal we've ever
done was 70 30 on the back end.

So when we give people our track
record data and tell them that our

investors have had an average 20% IRR,
um, over a 33 year period, we want it

to be an apples to apples comparison.

If the fund had a different.

Sharing arrangement that our legacy deals
that we, you know, before we started the

funds, it would be apples and oranges and
it really would be a valid comparison.

So that was the other motivation when
we chose 70 30, that was consistent

with what we've done, you know, across
all the deals we've done over 33 years.

So.

Brandon Giella: Yeah, no, it makes sense.

Uh, first of all, I like
simplicity and I like that you

guys kept to a simple arrangement.

'cause, 'cause finance
can, can get super complex.

But what you're describing is, is
it seems pretty straightforward.

Everybody wins, you know, at
different, you've got these.

I call 'em hurdles, but you got these
kind of, uh, uh, movements through the

fund, through time, through getting money
back that everybody seems satisfied.

You guys took on the risk to
develop and build a project, set the

infrastructure to house the investment.

The investor supplied the capital,
and you guys, everybody wins.

It sounds like a really great deal.

Paul Bennett: The, the right structure,
and this is from a due diligence

standpoint, if one of our, our listeners
are out there looking at opportunities,

I think what you want I is, you don't
want an A sponsor who can win when you

lose, um, in, in our fund structure there.

The only fund level we fee.

Fee we have is a management
fee and essentially that covers

our cost to manage the fund.

The only other amounts that we charge the
fund are for actual services provided,

for example, property management.

We manage, we have a.

Group of 40, 50 people that are in our
project management division, a product,

um, property management division.

Um, and we charge a 5%, it's $1,500
a month or 5% of revenue, whichever's

greater, uh, which is as standard
as you can get at the industry.

We could, the fund could pay us to do
that because we have the capability.

If we didn't do it, the fund would
pay the same amount to a third party.

Uh, and we would have less control,
which would be worse for our investors.

So.

Um, other than that 2% management fee,
um, and I can promise you we ain't

getting rich on a 2% management fee.

Um, that's the only, so what you're
looking for is a sponsor who's covering

his cost on the front end and only
making profit when you get to that

fourth step in the waterfall where
he's earned that compensation by

creating a return for the investors.

Um, so when you see a deal
with huge fees up front.

Or, uh, you know, some sort of
inverted waterfall where the, the

sponsor starts getting dollars
before the investors are made whole.

That's not, that's not a viable structure.

I wouldn't suggest investing in a
structure that's set up that way.

Brandon Giella: Yeah.

And, and obvi, I, this goes without
saying, but I'm gonna say it anyway

'cause it's a podcast, uh, is if, if
you're seeing lines in the memorandum

or in the, the, the structure.

Somebody's like, what is that fee?

2% fee?

What is that?

You know?

And then Paul, talk to me about this fee.

You would walk somebody through all
the, where this shows up, why this shows

up, how this fits into this waterfall
structure, all that kind of stuff.

Paul Bennett: Yeah, in fact, we
just had an investor, we just had

a closing a week ago, 10 days ago.

Um, right after I came back, after
having been out for a little bit.

Um, so it was actually a week ago.

Um, and before he would pull the trigger,
he went through the PPM and looked at.

All the fees, the fund, the fund
management fee, and then went down

through all the fee for service.

The, the actual work we do that the fund
would have to pay a third party to do

if we didn't have the capability to do
it, um, and question every one of 'em.

And I was more than happy.

To walk him through each one of them and
you know, what we do for those fees and

why they're charged and what they would
cost in the market if they had the fund

had to go get them from a third party.

Um, and so absolutely we're as transparent
as you can be on that and, um, you know,

feel like we've been at this a long time.

I don't think you can treat people
unfairly and hang around for 33 years.

Brandon Giella: Yeah, that's right.

That's right.

And you know, I like your point.

Somebody's gonna pay those fees
somewhere and, and there is in a,

if you're paying a third party,
there's that coordination tax.

You know that, that just.

Trying to, trying to manage the
management that that's, you guys kind

of take that out because like you said,
you kind of have more control, which

Paul Bennett: Yeah, if your grass

Brandon Giella: a lot of efficiencies.

Paul Bennett: yeah, if your grass
needs cut, you can cut it yourself.

Or you could hire somebody
to cut it in which of those

scenarios do you have more control

Brandon Giella: yeah.

Right, right, right,

Paul Bennett: Um, and so we do
all our own development work.

We do all our own
construction management work.

Um, you know, we, we
manage the properties.

Those are real services with real
value and real cost associated

with them that we perform on behalf
of the fund, uh, so that the fund

doesn't have to hire a third party.

Um.

To, to do them.

So I didn't mean to get off on a fee
discussion, but, um, anyway, but yeah,

Brandon Giella: it's helpful.

Paul Bennett: um, I, I'll give
you one more complex example.

I mentioned it, this is not uncommon.

I don't particularly love it, but here's
an example of a more complex waterfall.

Um, and, and I'm just gonna
make this up outta whole cloth,

but it could look like this.

Step one is a hundred percent of
any distribution goes to investors

until they receive a complete
return of their invested capital.

Then a hundred percent of all
proceeds go to investors until

they get their preferred return,
whatever rate that is set at.

So let's say 7% again, thirdly,
the sponsor gets a catch

up on the preferred return.

Um, and then the fourth, fifth, and sixth
steps in the waterfall can look like this.

Um.

The sponsor gets 20%, the investor gets
80% up until the point the investors

have received a total return of 15%,

Brandon Giella: Hmm.

Paul Bennett: and then the sponsor
gets percent and the investor

gets 60% until the investors
have received a return of 20%.

And beyond 20%, the sponsor gets
half and the investors get half.

Brandon Giella: Hmm.

Paul Bennett: So you see that's a
tiered waterfall where the sharing

arrangement in that last step or steps
in the waterfall is contingent upon the

return that the investors have received.

It.

Brandon Giella: Mm-hmm.

Mm-hmm.

Paul Bennett: and that
could be a fair structure.

It's a little more complex.

I'd hate to have to do the calculation.

Thank goodness we have fund administrators
who, you know, that's what they do.

Um, but, but it also in, in some cases
can rob investors of the upside if

you get a project or an investment
that does extraordinarily well.

Um, I'm not saying it's a, a
bad thing or that sponsors that

use it are bad, not in any way.

I just think it bears a
little bit more analysis.

In terms of, you know, if the
sponsor were to get to that 50 50

split level in the waterfall, are
you gonna be infinitely pleased with

the return you got as an investor?

Are you gonna feel like maybe they
got a little more than they should?

Brandon Giella: Yeah, that's always
the risk with long-term investments

if you have an outsized return, is
who really benefits O over time.

And there's always, you know, like
venture capital's always known for

having these really amazing returns
that are investors if they do well.

Uh, or you have.

CEO pay packages like Elon Musk,
if he does well with the enterprise

value, he gets a trillion dollars.

But, you know, so who, who, who
wins in the, in the long run?

It's always a question, but I

Paul Bennett: Yeah, that's a, that's a
question that's hard to answer 'cause it

really is really only can be answered in
the context of a specific opportunity.

You can't really answer it

Brandon Giella: Right.

Paul Bennett: but that's the more
complex approach to waterfalls is

adding tiered sharing arrangements
that are tied to the investor returns.

Um, would be sort of the, the,
the, the more complex, um, style

of water of waterfall that I
mentioned a few minutes ago.

So.

Brandon Giella: yeah.

Well, what else should investors know
if they're listening here, thinking

due diligence on their own deals?

You know, they might be watching on
YouTube, listening on Apple Podcasts.

Hey, I, I got this opportunity.

What should I be thinking
about or thinking about?

Aaa storage investments and
growth fund two, I'm looking

at self storage properties.

What am I, you know,
what am I looking about?

What am I looking at and
how am I thinking about it?

Paul Bennett: Uh, I think the being our
topic, the focus today is the waterfall.

I think it's certainly an integral part.

Of, of making an investment decision.

You wanna understand it, you wanna
make sure that it, it it's fair.

Um, you know, and, and, and I,
I hate to use the word feels

because it's, it's a very tangible.

Um, structure within the investment,
um, but also say all the time that unmet

expectations are the root of all anger.

So, um, I think looking at it from
the standpoint of does it feel fair?

Am I gonna with when this, with
this investment with wraps up, am I

gonna feel good about how, you know,
the sponsor as my partner and what

we each got from this investment?

So there's that aspect.

There's any others just.

A a, a pure analysis, you know, is
the sponsor share and the investor

share balanced in a way that ly
represents the risk the capital is

taking and the expertise that the
sponsor's bringing to the table.

Those are really the two components.

Um, how much risk are you taking and how
much of a contribution to the success

of the investment is the sponsor making?

And that's really what should
set the balance of that sharing

arrangement in a waterfall.

Brandon Giella: Well said.

Thank you.

Thank you.

It's helpful.

Get the feel, get the balance, is a fair
think long term, think massive upside.

I think downside, long term unex,
unexpected, you know, outcomes.

How will this feel to you?

I like that,

Paul Bennett: Yeah.

In

Brandon Giella: given the
expertise of the sponsor.

Paul Bennett: yeah, in our, in our
fund, we have 11 different projects

in fund two, so the waterfall will
be applied 11 different times.

As each of those properties sold, I, in
fact, I'm working through this exercise

with our fund administrator right now.

People probably wouldn't think about
this, but, um, we actually specifically

allocate the specific amount of capital
that was invested in a project to

that project, along with the timing of
when it was invested so that when that

property is sold, we know it or we don't.

We know, but the administrator's really
the one that deals with it exactly how

much has to go back to investors for
them to get a return of their capital.

We know exactly when that capital was
called and how long we had it, and

it's usually called multiple times.

So it's a fairly complicated calculation
so we know exactly how much interest

they should have earned, which is
the second step in the waterfall.

And then.

Yeah, they calculate 30% of the
total amount of perf that was paid

to investors that comes to us as a
sponsor, and every other dollar left in

the bucket that you're poured out of.

It is split 70% to the investors and 30%
to us, but it's applied to each property

individually when it's sold, so we
can distribute that cash to investors.

And then at the very end, like I said
earlier, there's a clawback, there's a

check, there's a calculation that says if
you combine all of these 11 investments

into one bucket, and you calculated
what the sponsor should have gotten.

Did they, did they get one
nickel more than their 30%?

And if they did, we have to give it back.

Um, and, and if not, then the
last distribution is made.

And the, the investment liquidates.

Brandon Giella: And this is
why spreadsheets were created.

And I love and am thankful
for people that dig into that

'cause I ain't going to do it.

That sounds super complicated
in a, in a way, you know, to

actually model all that out.

Yeah.

Paul Bennett: IQEQ is
our fund administrator.

Um, they're based in New York,
New Jersey, and they're a global

company that does this for sponsors
of all sizes all around the world.

And I'm thankful for 'em every day 'cause
they do all the stuff I do not want to do.

Brandon Giella: Yeah, there ain't no
way I'm gonna be sitting in that model.

Paul Bennett: that's a lot of detail.

That's a lot of detail, huh?

Brandon Giella: that's right.

That's right.

Well, Paul, thank you so much
for walking us through that.

I know it's a question that you get
often with investors, and I know it's

something that, you know, comes up
in different ways and it's something

that you think about all the time and
how this applies in different cases.

And, um, and I like the philosophy or
the methodology that you have behind it.

That of course then impacts the even
down to the governing documents of

the, of the fund and the, the entities.

And so anyway, it's very helpful to
understand how you guys are thinking about

it and why and where that comes from.

Paul Bennett: Last little tidbit,
I would suggest if you're making

an investment, don't just look
at the waterfall in the PPM.

I'm sure in almost every case
it's an accurate description,

but it's a description.

Go read the legal language.

It's in the LLCA.

Go read the actual language and
just from a nuanced standpoint, make

sure that you really understand.

That governance, because it is governance,
it's a legally binding agreement between

the parties, uh, and members in that
LLC, how this is gonna be handled.

So it's worth, it's
usually not a long section.

I think ours is section six,
maybe has four or five sub

paragraphs, maybe a page total.

Um, so it's not a long read, but I
suggest you actually go look at the,

the governance document itself to make
sure you understand the waterfall.

Brandon Giella: That's helpful.

That is called due diligence.

Paul Bennett: Yeah.

Brandon Giella: I like that.

I like that.

Well, Paul, thank you very much.

Uh, I'm looking forward
to the next episode.

Glad you're back.

Glad we are back, and, uh,
we'll see you next time.

Paul Bennett: Yeah, absolutely buddy.

Enjoyed it as always.

Brandon Giella: See you.