Thread by @TheRealEstateG6

Got some questions regarding the flow of funds in an RE deal

The flow of funds is actually determined by the lender, which is provided in loan docs. Then, the operating agreement will have a separate FOF afterward for "excess" funds

Lender FOF on the left, LLC FOF on the right

Cash Management typically occurs when a debt covenant has been breached (usually the DSCR or Debt Yield dipping below a required threshold)

Once this occurs, all cash is swept into a "lockbox" controlled by the lender and follows the "lockbox" FOF (rather than the normal FOF)

The Cash Management Period can typically be resolved by 2 consecutive calendar quarters above a specific DSCR or Debt Yield threshold, after which time revenue is no longer swept into a lockbox and the normal flow of funds resumes

For what it's worth, the flow of funds has been simplified a lot - there're a lot of other possible fund flows

This chart doesn't address security deposits, casualty/condemnation subaccounts, etc

It can get extremely complex with more sophisticated deals

Additionally, the normal flow of funds (when not in cash management) differs greatly depending on how strict your bank is

Sometimes your bank is extremely lenient and the flow of funds is essentially voluntary

Other times the taxes/insurance/reserves are reserved for you

Once the cash reaches the "available cash" box in the diagrams above, it's then subject to the operating agreement, which obviously is under your control - so doesn't *have* to flow the way it does

The right picture shows how the LP/GP "waterfall" is typically structured

The waterfall structure in the image above is based on a promote waterfall of 20% promote over a 10% return and 30% over a 30% return promote

In the above graphic, the GP is the "General Manager" and the LPs are the "Class B Members"

That's pretty much it - the flow of funds are actually pretty logical

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