Imagine a waterfall that fits into vertically oriented buckets. Water is synonymous with money and buckets are creditors. The water first fills the first bucket. The second bucket is only filled after the first bucket is complete. When water flows, more buckets are filled in the order in which they appear. A cascading arrangement or an entry payment system describes the order in which creditors are paid. Two common uses of the term are in the debt and private equity sector. Simply put, a cascade describes how cash for distribution and profits in a project is cascading through a series of calculations to make payments to the developer and his investors in a pre-ordered hierarchical manner. The two letters, when they occur, generally deviate from the standard enterprise agreement by offering some investors different treatment in terms of the returns they receive. This is not to say that these are necessarily better terms for the investor who has this letter than the rest of the investors in this category. They are simply different, and they create another level that complicates overall math mathematics, from the level of the project to each of these individual investors. Once the capital is returned, 100% will continue to be distributed to the LP until a certain internal return (IRR) is achieved.
Whether it`s a global stunt or a deal-by-deal, this preferred return is always calculated on every cash flow. Stock cascades are one of the most difficult concepts for real estate investors to grasp. This is partly due to the different ways in which waterfalls are structured. The structure depends largely on the nature of the agreement, including the investment period and the number of investors involved. The following sections detail the most common components of waterfalls. This establishes the requirement to know which of these two days of day is the largest before descending to the level closest to the waterfall. For example, suppose John has three credit cards: the A card, the B card and the C card. Interest rates for cards are 20%, 12% and 10% respectively. John wants to withdraw from the credit card debt, so he decides to pay the highest interest card first. Minimum monthly payments on cards are $150, $100 and $75. John pays for the waterfalls. First, he pays the minimum on each card ($325 in total) each month, then sends the A card an additional $800.
When the A card is finally paid, it cuts it out and applies the additional $800 per month, plus the monthly payment of $150 that he used to send it to the A card ($950 in total) on the B card. If the B card is paid, John uses the $800 in additional payments, plus the minimum payment of $250 he used to send the A and B cards ($1,050 in total) to the C card until it is paid. What complicates matters further is that different classes can have different return metrics, which contain different preferential return levels, different obstacles and many different splits. 90-10, 80-20, 70-30, 60-40, 50-50 40-60. The most complicated stunts can have 7 to 10 layers of calculations. Despite these real-life examples, the lack of preferential returns is the rarest of cascade structures according to IMS, whose investor management software currently has more than $40 billion in shares on the platform. In commercial real estate, the term “return barrier” is used to define the return to be achieved before cash flows can be paid to the next level of investors in the stock cascade. Most waterfalls have several obstacles back.
In general, performance barriers are based on obtaining a pre-defined internal return (IRR – for more information below) or a capital multiplier.