Question to the GP/LP monkeys out there.
So lets say you put in place the typical JV with IRR promotes at 20 over 10, 30 over 15 or whatever they may be for a development play. You buy your asset, build it out, potentially lease up and hold for a bit, sale - boom, profits realised and promotes crystalised, happy days and celebrations all round.
In the above scenario were instead of a sale, the LP has decided on build completion to hold it for 10y because the asset is a cash cow, but GP still needs to realise their promotes and the longer term hold is eating away at those higher IRRs - which leads me to my question;
What is the happy medium that people here are happening to see/experience in the market? - I don't think any Catch Up/Look Back/Clawback provisions are going to help...I could be wrong? Is there any sort of mechanic for a front loaded promote or is it simply a condition of renegotiation of the JVA in the case this scenario arises?
This already exists and it's crystalizing the promote in the refi at stabilization assuming you are using bridge debt for value add acquisitions or construction loan for development. The ownership % would adjust in favor of the GP and the cash flows would then be prorated based on the new equity %'s. There would then be no promote structure at disposition but instead would be a prorated return of cash flows and dispo/refi proceeds throughout the lifecycle of the deal.
GP / LP sign up to a 5 year business plan for a multifamily development asset to be held to stabilization. LP decides for whatever reason they would like to hold it long term which would obviously drag the project IRR down. If the GP has negotiated their docs correctly, they should have an ability to calculate the promote at an agreed window (say 3 months post stabilisation to replicate sale timeline), at which point a 3rd party valuation would be used to calculate a notional sale value. This value would be used to calculate the promote on the assumption the sale has taken place. Where I have seen this structure included before, the GP also has the right to put their equity to the LP (based on the valuation) if they don't wish to stay in the project at this point.