Worked model · hypothetical

One waterfall, five outcomes, every line shown

The same hypothetical deal — $2,500,000 of limited partner equity, an 8% compounding preferred return, a full catch-up, then 70/30 to a 15% internal rate of return and 50/50 above it — run through five exits. The arithmetic is printed rather than summarized, because the argument of the page is that tier order decides the outcome.

The waterfall used on this page

Paid in order. Each tier fills completely before the next receives anything.

1Return of capitalUntil the $2,500,000 of LP equity has been returned100% LP
2Preferred return8% per year, cumulative and compounding on unreturned capital100% LP
3GP catch-upUntil the GP holds 30% of the profit distributed so far100% GP
4First splitUntil the LPs reach a 15% internal rate of return70 / 30
5Residual splitOn everything above the hurdle, for the life of the deal50 / 50

A common shape, not a standard one. Every term here is negotiable and every one of them appears with a different definition in some offering.

The five exits side by side

Scenario	Distributable	To LPs	LP multiple	To GP	GP share of profit
Deal loses value	$2,200,000	$2,200,000	0.88x	$0	0%
Capital back, nothing more	$3,100,000	$3,100,000	1.24x	$0	0%
Preferred return satisfied	$3,700,000	$3,673,320	1.47x	$26,680	2%
Business plan works	$4,800,000	$4,110,000	1.64x	$690,000	30%
Business plan works early	$4,560,000	$3,902,054	1.56x	$657,946	32%

Hypothetical. Operating cash is held at $120,000 a year in every scenario so that only the exit changes.

Each exit, tier by tier

Deal loses value

Total distributable cash $2,200,000 over 5 years · LP equity $2,500,000 · LP multiple 0.88x

Tier	What it pays	Split	To LPs	To GP
1	Return of capital	100% LP	$2,200,000	$0
2	Preferred return, 8% compounding	100% LP	$0	$0
3	GP catch-up	100% GP	$0	$0
4	Split to a 15% LP IRR	70 / 30	$0	$0
5	Residual split	50 / 50	$0	$0
Total			$2,200,000	$0

Capital back, nothing more

Total distributable cash $3,100,000 over 5 years · LP equity $2,500,000 · LP multiple 1.24x

Tier	What it pays	Split	To LPs	To GP
1	Return of capital	100% LP	$2,500,000	$0
2	Preferred return, 8% compounding	100% LP	$600,000	$0
3	GP catch-up	100% GP	$0	$0
4	Split to a 15% LP IRR	70 / 30	$0	$0
5	Residual split	50 / 50	$0	$0
Total			$3,100,000	$0

Preferred return satisfied

Total distributable cash $3,700,000 over 5 years · LP equity $2,500,000 · LP multiple 1.47x

Tier	What it pays	Split	To LPs	To GP
1	Return of capital	100% LP	$2,500,000	$0
2	Preferred return, 8% compounding	100% LP	$1,173,320	$0
3	GP catch-up	100% GP	$0	$26,680
4	Split to a 15% LP IRR	70 / 30	$0	$0
5	Residual split	50 / 50	$0	$0
Total			$3,673,320	$26,680

Business plan works

Total distributable cash $4,800,000 over 5 years · LP equity $2,500,000 · LP multiple 1.64x

Tier	What it pays	Split	To LPs	To GP
1	Return of capital	100% LP	$2,500,000	$0
2	Preferred return, 8% compounding	100% LP	$1,173,320	$0
3	GP catch-up	100% GP	$0	$502,852
4	Split to a 15% LP IRR	70 / 30	$436,680	$187,148
5	Residual split	50 / 50	$0	$0
Total			$4,110,000	$690,000

Business plan works early

Total distributable cash $4,560,000 over 3 years · LP equity $2,500,000 · LP multiple 1.56x

Tier	What it pays	Split	To LPs	To GP
1	Return of capital	100% LP	$2,500,000	$0
2	Preferred return, 8% compounding	100% LP	$649,280	$0
3	GP catch-up	100% GP	$0	$278,263
4	Split to a 15% LP IRR	70 / 30	$652,907	$279,817
5	Residual split	50 / 50	$99,866	$99,866
Total			$3,902,054	$657,946

What the five rows show

The sponsor earns nothing in the first two scenarios, which is the preferred return working as intended. In the fifth, the same dollars arriving two years earlier lift the internal rate of return enough to move a larger share into the residual tier, which is why a hurdle expressed as an internal rate of return rewards selling sooner. Nothing about the property changed between those two rows.