Which line item is described as the first line when building a waterfall model?

• A. Levered cash flow
• B. Gross potential rent
• C. Net operating income
• D. Unlevered cash flow

Answer: (A)

The line item that starts the waterfall is levered cash flow. In a real estate waterfall, you distribute cash after financing costs, so the amount actually available to equity holders for the distributions is the levered cash flow—the cash flow after debt service and any financing reserves. This is the starting point before applying hurdles like preferred return, catch-up, and IRR splits.

Why this fits: gross potential rent is just revenue, not cash after expenses or financing. net operating income is cash flow before debt service, so it doesn’t reflect what’s left for equity after financing. unlevered cash flow is cash flow before debt service, again not the amount available to equity once financing costs are paid. Levered cash flow directly represents the cash available to be allocated through the waterfall.