Waterfall Agreement Definition
Another common component in equity cascade models is preferred performance. What exactly is the preferred return? Preferred return, often referred to as “pref,” is defined as the first right to profits until a target return is achieved. In other words, preferred investors in a project occupy the top spot and get the preferred return before other investors receive a profit distribution. Once this “preference” barrier is reached, any excess profits will be distributed as agreed. Although the structures of the waterfalls are very different, there are several components of commonly used waterfall models. Before delving into our example of step-by-step waterfall, let`s first take a look at some basic elements. No late payment has occurred as of the date of this agreement or is likely to have a significant adverse effect in a marketing agreement, or other material agreement with the borrower and an insurance company (together the “material arrangements”), which, individually or in conjunction with all these failures, could reasonably have a significant negative effect or significantly affect the value of the Trailing Commissions (as defined in the collection-cascade agreement). This type of agreement is advantageous because it allows equity investors to reward the operating partner with an additional and disproportionate share of returns. This additional share of returns is called promote, which is used as a bonus to motivate the operational partner to exceed performance expectations. Under a cascading structure, the operator receives a larger share of the profits when the project`s performance is higher than expected, and a smaller share of the profit if the project`s performance is lower than expected. As with all legal documents, the devil is in the details when it comes to important considerations that an investor must make before accepting a stunt.
In particular, while the structure of the waterfall is easily identifiable, a much more nuanced approach is taken when it comes to defining the measurements. For example, “return on capital” can be defined as the total paid-up capital that is made on the investments made or as an overall capital that is allocated to investments, capital expenditures and operating expenses, each definition having a significant impact on the outcome of the calculation.