This article is part of our passive investors guide on real estate syndications, available here.
One aspect of real estate investing that can be particularly confusing among newer investors is the concept of a promote. The promote is essential to align the interest of the real estate sponsors managing the deal with the investors who put up most of the capital.
In this article, we will cover what is promote in real estate investing, what the goal of the real estate promote structure is, and an example promote fee in real estate.
Key Takeaways
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A promote is a fee paid to a real estate sponsor for putting together a deal for investors to invest in.
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A typical promote fee in real estate is anywhere from 20% to 40% of the project’s upside.
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The promote involved in the typical real estate private equity framework is essentially the “carried interest” concept in the fund context.
What is the Promote in Real Estate Investing?
A promote is a fee paid to a real estate sponsor for putting together a deal for investors to invest in. This fee is paid from the upside gains on the sale or refinance of the property due to the sponsor’s expertise, time, and execution of the business plan. The sponsor promote can be a flat fee or a percentage of the sale price.
What is the Goal of the Real Estate Promote Structure?
The goal of the real estate promote structure is to incentivize real estate sponsors to put together deals and execute and manage the entire operations of the underlying asset or assets.
By offering equity splits and performance fees, real estate sponsors ensure that the asset performs so they can be compensated instead of earning large fees regardless of performing on the promise made to equity investors.
An Example Promote Fee in Real Estate
A typical promote fee in real estate is anywhere from 20% to 40% of the project’s upside.
For example, let’s say the promote is 30%, and after the property sells for $10,000,000, there is $3,500,000 in profit.
With the promote being 30% or a 70(GP)/30(LP) split, the real estate sponsor could retain about 30% of the $3,500,000 or $1,050,000.
This of course, would be after investors get back 100% of their initial capital contribution in the deal. Promote fees can vary depending on the deal’s specifics, such as the property’s location and the transaction’s complexity.
Is a promote a profits interest?
The promote involved in the typical real estate private equity framework is essentially the “carried interest” concept in the fund context. The profit interest reflects significantly more than a sponsorship capital (real estate investment) interest.
What is the Double Promote?
The “double promote” in private real estate investing occurs when the lead real estate sponsor and a secondary fund manager have two layers of promote before the funds investors receive their share of the cash flow distributions or excess profits.
For example, a real estate fund invests on the limited partner side into a lead real estate sponsors deal. The lead sponsors might share in an additional promote interest if the deal exceeds a particular return hurdle. The fund manager might have their own set of promote fees, lowering the net profit amount that those fund investors will receive.
This is considered a “double promote” because the fund manager and real estate sponsor are often the same company, hence the “double dipping” of fees.
The Developer Promote
The developer promote is the fee a real estate developer charges in the partnership to be properly compensated for creating and executing a new development project. The fee is typically a percentage of the total project cost or the project’s total sales/exit value.
The developer promote can vary depending on many variables such as the developer’s experience level, what specific services they are to contribute to the project, the risk profile, and much more.
Frequently Asked Questions About What is a Promote Structure in Real Estate
A financial sponsor is a company, typically a private equity firm, that provides financial services support in the leveraged buyout space of private equity.
A 10% promote indicates that a real estate sponsor has a 10% financial upside in the performance gains of an asset that the sponsor operates and manages.
Beyond preferred return hurdles, a commercial real estate sponsor or GP may receive “promotes”. This allows the sponsor to participate in a pre-determined upside upon the project’s performance, which usually occurs at the asset’s sale but can also be achieved through some capital/liquidity event.
What is the Promote in Real Estate - Conclusion
The goal of the real estate promote structure is to provide an incentive for real estate sponsors to bring deals to the table, and it helps ensure sponsors are compensated for their work.
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