Case Study #2 - Waterfalls Structure Explanation

Fernando Angelucci was asked a question about what a waterfalls structure is when it comes to investors and investing.
This is very interesting and it aligns the actions of all parties in the same direction. Both the theory and application of this structure are discussed in this video so you can understand and possibly use it for your own deals as well.
Fernando O. Angelucci is Founder and President of Titan Wealth Group. He also leads the firm’s finance and acquisitions departments. Fernando Angelucci and Steven Wear founded Titan Wealth Group in 2015, and under his leadership, the firm’s revenue has grown over 100% year over year. Today,
Find out more at
https://www.TheStorageStud.com
http://titanwealthgroup.com/
Titan Wealth Group operates nationwide sourcing off market investment properties for Titan Wealth Group’s acquisition as well as servicing a network of thousands of active real estate investors world wide. Prior to founding Titan Wealth Group, Fernando worked for Dow Chemical, a Fortune 50 company, rolling out a flagship product estimated to gross $1B in global revenues.
With an engineering background, Fernando is able to approach real estate investing with a keen analytical mindset that allows Titan Wealth Group to identify opportunities and project accurate pictures of future performance.
Fernando graduated from the University of Illinois at Urbana-Champaign with a B.A. degree in Technical Systems Management.
Titan Wealth Group was founded in 2015 with the vision of gathering individual investors that have the means to invest but lack either the time to find high-yield investment opportunities or the access to these off-market deals. All too often, founders Fernando Angelucci & Steven Wear came across investors who had deployed their capital only to regret the lack of consistency or degree of returns their investments were producing. In response, Titan Wealth Group provides access to highly-vetted real estate secured investments and off-market acquisition opportunities primarily in the Greater Chicago MSA. Today, Titan Wealth Group not only assists individual investors but has grown to support the acquisition goals and capital deployment of investment groups, private equity firms, and real estate investment trusts (REITs).
As a facilitator of wealth growth, Titan Wealth Group believes that success is not limited to the sum of our efforts and is infinite with what can be accomplished through partnership.
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I was just asked a question on, What a Waterfalls Structure is for investors investing in a real estate project or in a syndication. Waterfalls Structure is very interesting and it really aligns the actions of all parties to be moving in the same direction. So here's how a Waterfalls Structure works.

Let's say an investor will invest money into a deal. Let's say a hundred thousand dollars into a deal. How the Waterfalls Structure will be set up is usually there's, what's called a preferred return. And then there's an equity split on the backend. So this investor is actually an owner in the property in this Waterfalls Structure. It's not really interest paid. So for example, just use rough numbers. Let's say that there is a deal that investor wants to participate, and he wants to put a hundred thousand dollars into that deal. And the Waterfalls Structure is a 6% preferred return with a 50/50 ownership split on the back end.

Now that 6% preferred return or that 6% "pref" as it's known in the industry, what that means is that the investor will get all of his money back plus a 6% return on top of it before any type of split happens where the sponsoring party or the syndicators make any money. So what will happen is, in our previous example, that investor will get his entire hundred thousand dollars back. Then he'll get an additional $6,000 on top of that before the sponsor, let's say in this situation is me, even sees a penny of any of the returns. Then once he gets that $106,000 back then the 50/50 split starts. And I will get 50% of the profit. And then the investor will get 50% of the profit, but that I won't see a dime until that investor gets his preferred return. And the reason it's called the preferred return is because he will get that money back before the ownership splits are taken into account.

So that's a very basic Waterfalls Structure. You can get very creative with this. It's really up to the imagination on how you structure these. There can be hurdles if you will. Some of these hurdles will say, okay, you know, the investor gets a 6% preferred return. So he's getting a hundred percent of the income. And then once he gets to that 60% preferred return, then it's 75% to him, 25% to the sponsor. And then once he gets up to a 9% return, then it's a 50% split to him and a 50% split to the investor or the syndicator. And then say, once he gets up to a 15% preferred return or 50% return on the investment, then it goes to 25% of the income will go to the investor. And then the other 75% will come to the syndicator. So the reason why these hurdles are put in place is to really align the syndicator's efforts to get paid, only once his investors get paid.

This is a really good structure that a lot of syndicators will use. And the higher you go in the syndication levels, the more sophistication, the bigger groups you're dealing with, maybe like private equity funds or hedge funds, the more complicated and more moving parts there will be in these waterfall structures. I'm someone that likes to keep it simple. I love the "KISS" method. The K I S S. Keep It Simple Stupid method, you know, cause it confuse mind to always says no. So I like to just say, Hey, you'll make 6%. And then after your 6% is made, then we split the profits on the back end or whatever it is. Just to make it easier to wrap the mind around instead of having to dig through all these Excel models.

So if you'd like to learn more about Waterfalls Structures or syndications, feel free to drop me a line. My name's Fernando Angelucci, and I'm The Storage Stud. You can find more information on our website at www.TheStorageStud.com