Equity Waterfall, Return of Capital, Pref & Promote

Distributes total sale proceeds through a simplified GP/LP equity waterfall of return of capital, then preferred return, then the promote split, with the pref paid on both LP and GP capital. Inputs are the LP contribution, GP co-investment, preferred return rate, residual split, and total distributable proceeds.

By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026

From the author: Devon Coombs, CPA, MBA teaches finance at Santa Clara University and works with corporate teams on practical AI.

AI training for finance teams · Consulting · The 10 Laws of Finance

Interactive Tool

GP / LP Distribution Waterfall

Inputs

LP capital contribution

GP co-investment

Preferred return

LP residual split

Total distributable proceeds

Promote = GP profit share above its capital ownership. Here the GP put in 10% of equity but, when the deal profits, takes 20% of the residual.

Waterfall tiers

1 · Return of capital

LP $1,800,000GP $200,000

2 · Preferred return (8.0%)

LP $144,000GP $16,000

3 · Residual split (80/20)

LP $272,000GP $68,000

LP total

$2,216,000

Profit $416,000 · ROIC 23.1%

GP total

$284,000

Profit $84,000 · ROIC 42.0%

After capital and the preferred return are paid, $340,000 of profit remains. The GP contributed 10% of equity but earns 17% of the total profit, that excess is the promote.

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This calculator comes from the free Real Estate Finance course, where the concept is taught with readings, worked examples, and practice questions.

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Built by Devon Coombs, CPA, MBA, Teaching Professor of Finance at Santa Clara University.