If it isn’t in the operating agreement and PPM, it isn’t in your waterfall—marketing summaries are not binding economics.
At a glance
- Definition: A waterfall is the contractual order for distributing cash among lenders, reserves, investors, and sponsor—each deal defines its own layers.
- Passive income layer: Many deals pay investors from distributable cash flow (for example rental income) after reserves—subject to definitions, lender tests, and shortfalls in the documents; not a bond coupon.
- Splits: Promote and investor/sponsor splits apply only after hurdles defined in the OA— compare “headline” percentages to actual clause text.
- Stoneforge context: We describe typical frameworks on investment structure; exact numbers vary by offering.
Common building blocks
- LP distribution priority: Contractual ordering that pays limited partners from available cash before sponsor promote, subject to cash availability and document wording (not a guaranteed payment).
- Catch-up / split: After distribution hurdles defined in the operating agreement are met, remaining cash may split between investors and sponsor—for example 70% / 30%—only as written in the deal.
- Return of capital: Order of principal return at refinance or sale is defined in documents—not assumed from summaries.
Stoneforge framework (high level)
We describe how we typically talk about passive income, distributions, and splits on investment structure. Exact economics vary by transaction and must match the signed agreements.
Why “document-first” diligence
Headline percentages can differ on accrual, compounding, and shortfalls. Investors should review waterfalls with counsel and tax advisors before subscribing.
Reading order in the operating agreement
In practice, diligencing a waterfall means tracing definitions (what counts as distributable cash), timing (monthly vs quarterly, lender traps), catch-up language (if any), and liquidating events (how sale proceeds sequence relative to return of capital). Two deals with the same headline split can behave differently after you read the clauses.
Vocabulary vs your subscription documents
Articles like this one establish vocabulary only. Your subscription economics—including how shortfalls are treated, whether unpaid amounts accrue, and how refinancing interacts with return of capital—exist solely in the executed agreements for that offering. Pair this overview with the firm’s legal & compliance disclosures before investing.
Contact | Investment structure | Legal & compliance
This overview is not an offering. Consult the PPM and subscription documents for any specific syndication.