What is the 'waterfall' distribution structure commonly used in real estate syndications and private equity deals?

In real estate syndications, the waterfall describes the exact sequence in which cash flows are distributed among investors and the sponsor (general partner). A common structure works as follows: first, limited partners (LPs) receive a return of their contributed capital; second, LPs receive a preferred return (typically 6% to 8% per year) before the sponsor participates; third, the sponsor receives a 'catch-up' payment to reach their negotiated profit share; and finally, remaining profits are split according to a pre-agreed ratio such as 70% to LPs and 30% to the sponsor. The sponsor's disproportionate share of profits above the preferred return threshold is called the 'promote' or 'carried interest' and is the primary way real estate sponsors are compensated for finding, managing, and executing the investment.