There are a few ways this kind of waterfall can be built and it simply depends on the operating agreement in place and the exact language. Different styles and language can mean different modeling formulas and different results. I will discuss what I've done in the template below.
Relevant Template:
If you are in a joint venture, usually it means one party supplies all the money or most of the money and the other part does most of the work / operational management. This is quite common in real estate, but can exist in all sorts of businesses / industries.
The general purpose of the hurdle-based waterfall is to incentive the operator (GP) to give good returns to the LP (investors) and as they LP's returns go up, more cash starts to get split to the GP. That's the basic idea happening. In a situation where IRR hurdles are being used, that means the measure of the hurdle being reached is based on the total cumulative IRR that the LP has received up to a given point. This is different than simple preferred interest hurdles.
Usually, the first hurdle is somewhere around 7-11% and up until that is reached, the LP is going to get the majority of all cash distributions. This will depend on the actual contribution rate of the GP / LP and deal specifics, but at a high level this first hurdle means the GP is not getting a ton of return for their work / effort / any capital contributions. They may be getting fund management fees / asset management fees though.
So, sometimes the GP will put in a 'catch-up' provision and that basically says that after the LP receives their initial first hurdle rate, all the cash goes to the GP after that until the GP has reached a defined IRR. It helps the GP when the first hurdle rate is not splitting cash pari passu or if it is 100%/0% in favor of the LP. This is only relevant if the GP has contributed some amount of equity (if they didn't, then there is no IRR possible as it is based on return on investment).
After the GP gets caught up, the remaining distributions will continue to go through the remaining IRR hurdles for the LP and cash distributions are split at the defined split percentages accordingly.
Alternative Method
You could do a catch-up that catches up the total distributions to the GP after the LP has received their preferred rate of return in full. This could be in the form of a large promotion in carry to the GP until the total cash returned equals the cash returned to the LP. Again, this still prioritizes the LP, but then once that hurdle has been satisfied the GP will get much of the cash flows until the distribution amount is equal.
Doing it based on total distributions rather than IRR is an option and will give quite different results depending on the exact contribution and hurdle rate thresholds. After the GP has been caught up, the distributions will then go back to some determined rate that is agreed upon.
Note that the way the GP 'catches up' can happen in various ways so this needs to be defined in the agreement exactly.
Note, there are probably many other ways to model this out as well, but the point is that modeling it out is important, so all parties understand what is going on and the impact it has on returns.
