In real estate financing, a sponsor may contribute little or no equity and still receive more than 40% of a deal’s profits. This is not a loophole — it is an incentive structure and outlined in the offering documents. The private placement memorandum explains the structure broadly, while the operating agreement lays out the specifics.
This structure is called a waterfall, and understanding it is essential for passive real estate investors.
The GP, or general partner, is the sponsor. The GP finds and underwrites the deal, negotiates the acquisition, signs off on the debt and manages the asset as it executes the business plan. The GP often contributes 5% to 20% of the total equity, although the terms are negotiable.
The LP, or limited partne...
