In a real estate exit waterfall, how are sale proceeds distributed?

• A. All proceeds go to debt.
• B. Equity receives before debt.
• C. Proceeds distributed according to a predefined waterfall prioritizing debt repayment, preferred returns, then equity.
• D. There is no need to consider preferred returns.

Answer: (C)

Real estate exit waterfalls allocate sale proceeds in a fixed order: debt is paid first to satisfy lenders, then any preferred returns to investors who have priority, and finally the remaining proceeds flow to the equity holders. This mirrors the capital stack, where lenders take priority to protect their investment, followed by investors with preferred returns who are entitled to a hurdle before equity profits are distributed. If proceeds went entirely to debt or to equity before honoring these priorities, it would misalign risk and reward and undermine the agreed structure. That’s why the correct approach is a predefined sequence prioritizing debt repayment, then preferred returns, then equity.