A waterfall structure in an industrial land development partnership outlines how profits are distributed between the landowner and the developer, typically in sequential tiers. It aligns incentives, controls risk, and ensures clarity in financial sharing based on contribution, timing, and performance. Below are five key tiers or phrases commonly found in a well-defined profit-sharing waterfall:
1. Return of Capital Contributions
- The first tier ensures both the landowner and the developer recover their respective capital investments.
- For the landowner, this could be the assessed value of the land (often pegged to a date of agreement).
- For the developer, this includes approved cash contributions, such as remediation, infrastructure, design, or regulatory expenses.
- No profits are shared until all invested capital is fully returned.
2. Preferred Return (IRR or Fixed Percentage)
- The second tier compensates one or both parties with a preferred return on their capital.
- Often structured as an internal rate of return (IRR) (e.g., 12% per annum) or a fixed rate.
- Can be exclusive to the developer (to reward execution risk) or shared if the landowner is passive but strategic.
- Designed to prioritize early-stage financial exposure.
3. Basic Profit Sharing (Pari Passu Split)
- The third tier represents the core profit-sharing phase, typically split parity-style (e.g., 60:40, 50:50).
- The ratio is defined in the joint development agreement (JDA) or joint venture (JV) contract.
- This phase covers net profits after capital and preferred returns are met.
- Represents the primary financial upside for both parties.
4. Promote or Developer Incentive
- A promoted tier rewards the developer for achieving performance above a specific return threshold.
- For example, if IRR exceeds 18%, the developer may receive a higher share of incremental profits (e.g., 70% instead of 50%).
- Encourages efficient execution, cost control, and timely delivery.
- This tier may be subject to audited profit realization and milestone triggers.
5. Catch-up or Deferred Rights
- In some structures, one party (typically the landowner) may receive a catch-up payment if early tiers favored the developer.
- Also used if the landowner agreed to defer initial returns in exchange for a larger back-end share.
- Allows equity balancing in staggered projects or phased land contributions.
- May include clauses for reinvestment or rollover into future phases of the same partnership.
