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Tilden Moschetti: How do
waterfalls work in a

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

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

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attorney with the Moschetti
syndication Law Group.

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You may be wondering to yourself
exactly how our distributions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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that comes after that preferred
above that preferred return of

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

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

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

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

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

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

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and we need to give that
preferred return this pref to

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

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

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

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

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

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

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

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that still needs to be divided
between investors and the

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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initially gave you that was 5
million remember? After the

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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preferred return payments and
you split out the cash for

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typically in a real estate
investment but really any kind

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

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

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Tilden Moschetti. I'm a
syndication attorney with these

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Moschetti syndication Law Group.
We specialize in Regulation D

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Rule 506b and 506c syndications
and funds