Distribution Waterfall
A distribution waterfall is the set of rules that determines the order and proportion in which a deal's cash flow is paid out to investors and the sponsor.
A distribution waterfall is the rulebook for who gets paid, in what order, and in what proportion, when a deal produces cash. Money flows down a series of tiers - each one filled before the next begins - which is why it's called a waterfall. It governs both the regular income a deal throws off and the lump sum when an asset is sold.
A common four-tier real-estate waterfall runs: (1) return of investors' capital, (2) the preferred return, often around 8% per year, (3) a catch-up to the sponsor, then (4) a split of the remaining profit, such as 80% to investors and 20% to the sponsor. That final sponsor share is the carried interest, or "promote" - the sponsor's reward for performance above the pref.
In a tokenized deal, the waterfall is defined in the operating agreement and, increasingly, encoded so that a smart contract splits incoming cash automatically. Payouts are made pro rata within each tier, so each token receives its proportional slice of whatever that tier distributes.
The waterfall is where the real economics of a deal live. Two deals with the same headline return can pay investors very differently depending on the tiers, the catch-up, and whether the pref is cumulative. Model the waterfall against realistic outcomes - not just the best case - before you judge what a token is likely to return.
Source: SEC (sec.gov), as of 2026.
Mentioned in
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- What Happens When a Tokenized Property Sells
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Educational content, not financial or legal advice.