Payment Priority Schedule

A Payment Priority Schedule, often called a waterfall, specifies the order in which incoming cash—loan proceeds, operating revenues, or liquidation proceeds—is applied to fees, expenses, taxes, debt service, reserves, and investor distributions in a commercial real estate deal. The schedule clarifies senior and subordinate payment tiers, interest versus principal allocations, and any trigger-based shifts in priority. It governs both construction draw disbursements and ongoing cash flow distributions, ensuring participants know which claims are paid first under normal operations and in default or disposition scenarios.

Use the Payment Priority Schedule to structure lender draws, daily cash management, and investor distributions. Lenders and servicers reference the schedule when applying tenant receipts, operating surplus, and disposition proceeds, ensuring that senior debt service and required escrows are funded before subordinate obligations or equity distributions. For borrowers and sponsors, understanding the waterfall is essential when planning cash distributions, meeting debt service covenants, and negotiating subordinate financing. During workouts, the schedule determines which parties are paid from available cash and guides restructuring proposals.

The Payment Priority Schedule is fundamental to credit analysis because it dictates recovery sequencing and affects loss severity for each layer of the capital stack. A well-defined priority mitigates disputes over distributions, enforces lender protections, and helps investors and lenders assess cash flow coverage. For sponsors, priority terms directly influence timing of returns. Inadequate or ambiguous priority provisions can cause operational confusion, delayed payments, or litigation in distress situations, so clear waterfall language is critical to protect all stakeholders.