Lets say sponsor to LP split is 90/10, if the sponsor outsources managerial/operational responsibilities out and takes a more hands off approach, how does this affect the promote structure?
Would the management fees be taken from the repayment to the sponsor? Or is this generally something that is drawn out in the owner's agreement where both the sponsor and LPs agree to take that expense out from the cash flows?
I feel like I should know this...
If you mean management fees, it should have no impact on the promote/waterfall structure. management fees are taken out of opex and will be baked into any distributable cash for from operations. Any other fees (asset management, guaranty fees, etc.) as rarely modeled into the waterfall and shared between sponsor and LP...typically whoever is receiving the fee simply tacks those revenues onto their final gross distributions, and recalculates their returns with the additional amount.
In my experience, the promote negotiations are not impacted by whether or not you are managing the property. That, as mentioned, is a separate set of chores that is compensated for in the form of a property management agreement, and is usually 2-4% of Effective Gross Revenues.
Rather, the promote is for how the development is run, and how the project as a whole is operated....not property management. Even with change is responsibility for this, I don't think it would first be docked from the promote, but rather be drawn up as who is going to pay that cost. Meaning, if you decide to outsource to a third party. Your promote will be paid out as if you were still doing it yourself...you would just take those funds and pay the 3rd party the cost, and keep/lose the rest.
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