Real Estate Waterfalls
Definitions and Best Practices

Believe it or not, Microsoft Excel has already been around for over 35 years, and it has become the industry standard for many businesses' financial and analytical needs. In fact, 1 in 7 people on the planet use Microsoft Office regularly, and 78% of investors use spreadsheets for investment management. But spreadsheets have their limitations, and for CRE firms calculating real estate waterfalls, typos and oversights can have costly repercussions.

What are Real Estate Waterfalls?

Real estate waterfalls, or private equity waterfalls, are financial models that specify how profits are distributed among partners in a commercial real estate transaction. There are multiple variables involved, and cash flow can be split in a variety of ways, increasing the complexity of this process. These provisions are determined through negotiation with terms regarding preference and timing set in the signed contracts. Due to the variations in structure and number of tiers, there is no one-size-fits all solution for distributing returns.

The Problem with Spreadsheets

Spreadsheets have long been used for real estate waterfall calculations. Spreadsheet tools like Excel are accessible and affordable, and most people have some experience with them, which means onboarding and training resources can be kept to a minimum. But spreadsheets do have their limits. You can almost always get a result in a spreadsheet, but that in no way guarantees accuracy.


Studies repeatedly show that 90% of spreadsheets contain at least one error, and further research demonstrates that attempts to correct those problems often introduce additional errors. In other words, if you calculate 10 waterfalls, 9 of them will not be 100% accurate. More often than not, these are not bugs or defects but rather mistakes that can be attributed to human error. On average, six people are involved in some capacity with the private equity waterfall distributions, but getting more parties involved actually increases the prevalence of mistakes.

The reason that the error rate is so high in spreadsheets is because there are so many ways that errors can be made. Common spreadsheet errors include mistyped numbers, incorrect formulas or logic, rounding mistakes, improper cell formatting, and copy-and-paste inaccuracies. Just one small error – a wrong number, a missing negative sign, etc – can have a ripple effect across dozens of linked spreadsheets and hundreds of lines of data. Sometimes it’s clear when a mistake has been made, at which point you still need to figure out where it is or what is causing it. In other cases, it’s not obvious, and the (inaccurate) data is accepted as truth.


The information in spreadsheets is used to make important decisions and financial distributions. Most CRE firms have a single person who is responsible for the data entry in waterfall distributions, which means it’s hard for someone else to help them or double check their work. Additionally, the time-consuming nature of using spreadsheets to calculate waterfall distributions pulls resources away from higher value work.

In the event of an error, as is statistically likely to occur, the cost to the firm can be thousands or millions of dollars in time and money, as well as a damaged reputation, poor credibility, impaired business relationships, and lost future revenue.

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78% of CRE investors use spreadsheets for investment management

Enter Real Estate Waterfall Technology

Investor management software, such as IMS, automates and streamlines waterfall formulas and calculations, uses customizable templates to maintain compliance, and seamlessly connects to distribution processes. Waterfalls can be calculated with just the click of a button, and you can customize the approval workflow to ensure all stakeholders have had the opportunity to review. A technology solution also has built-in backstops and is always testing and double-checking calculations, further reducing risk and error.

The Benefits of Real Estate Waterfall Technology

The best way to reduce spreadsheet errors is to move away from siloed data and antiquated technology. Investor management software is just the solution. Commercial real estate firms can expect to experience the following advantages when they transition from spreadsheets to real estate waterfall technology.


Creating rules for a waterfall distribution can be very manual and time-consuming. Automating this complex process means that waterfalls can be calculated in mere minutes, vastly improving efficiency and effectiveness. Click here to see how one firm uses IMS to quickly and easily calculate waterfall distributions, saving over a month of work over the course of a year.

Additionally, automation lets commercial real estate firms create repeatable processes while maintaining a high degree of accuracy, enabling businesses to manage larger portfolios as they grow and scale.

With the right technology in place, CRE firms can calculate waterfall distributions in minutes instead of months


The complexity and variation in waterfall distributions can make calculations very cumbersome. Even one small typo can result in incorrect payouts, which can have major implications for the bottom line.

Further, compliance isn’t optional, so calculations have to be accurate and follow the proper format. Real estate waterfall technology offers templating capabilities, which enables companies to maintain compliance with guidelines, as well as to mitigate risk. Waterfall audit features serve to troubleshoot any discrepancies.

The increased speed and accuracy and decreased risk offered by investor management software such as IMS means huge cost and resource savings for any commercial real estate firm. What was once a resource-intensive and error-prone task is now a quick and accurate activity that saves times and improves investor relationships.

Ready to Get Started?

Investor Management Services (IMS) is the leading investor management software platform for CRE owners and investment firms. Today, we have over 550+ customers who have been able to reallocate thousands of hours back to value-add activities for their 85,000+ investors in 98 countries. The IMS Platform is being used to calculate $2+ Billion in distributions and $50+ Billion in equity. To learn more about how commercial real estate firms have used IMS’ investor management software platform to save time and resources, drive value, and improve the investor experience click here. Ready to go ahead and take the next step?

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