Waterfall for long term hold
Hello, Has anyone had experience with a structuring promoted interest waterfall for a development deal with no planned exit. The developer builds and owns their projects for the long term and planning to bring on a JV equity partner with the same long term hold strategy. I have only dealt with deals in which sponsor earns promote at exit. I am contemplating a promote based on stabilized yield on cost with multiple tiers. I would be grateful if anyone could provide examples of what they've seen/worked on. Thank you
I've worked on a few of these recently. We have a few options
Upon stabilization go through some valuation process (3 appraisals, BOV's, refi calcs) and come up with a value for the property. Using a simulated sale and the estimated value from your valuation process calculate the total proceeds to the developer and LP reset their ownership of the asset accordingly and distribute all proceeds according to the new ownership %'s. No further promote for the GP on the transaction.
Establish a "transition date" and various NOI targets for the development at that transition date. For each NOI target have a dedicated "developer success fee". This incentivises the developer to maximize NOI within a certain time frame. Payout the success fee accordingly and then split the remaining proceeds going forward with respect to your capital contributions.
Build a put option into the operating agreement and, if the property is performing well, exercise that option to buyout the developer's interest and continue to hold the asset long term.