Trader looking at a real estate deal. Someone sent me a pro forma of a joint venture. Its a 2 and 20 boutique structure with 2 parties. The sponsor however is charging his back end promote as 20 of the whole project and not 20 of the equity he is raising. Is this right?
Example....
25 million equity for each party.
back end sale worth 100mil
50 mil to each party.
sponsor taking 20 mil leaving 30 for investors. Shouldn't he only be entitled to 20% of our half of the investment, or 10 mil?
Thanks in advance
Hi Markertmaker, the silence is deafening, sorry about that.... Any of the threads below helpful?
If those topics were completely useless, don't blame me, blame my programmers...
I re-read and I think what may be confusing you is the colloquial use of the term 'promote'. Yes, if the 'promote' is 20%, then they get 20% of the money that should have gone to you. Sounds like they're just modeling a cash flow split. I don't think they're trying to pull a fast one. Most people just use the word promote to talk about their incentive fee.
yeah I mean that no doubt seems rich...I think your initial reaction is the right one. I see people try and pass off all sorts of justification for what the "promote" is. In the end, it has to make sense for the deal and the level of value added by the sponsor - or else it just wont float. Now with that being said, who knows how the legal docs are structured. I think more detail is needed here in that regard. What is ;right; or ;wrong; unfortunately is largely irrelevant in that its a JV that already has binding terms and OA.
I haven't really seen a 2/20 at a project level.
Typically, in a syndication the LP will get some sort of preferred treatment, then GP gets a large promote.
Waterfall Example: LP Return of Capital GP Return of Capital LP Preferred Return (1.4x multiple or 8% compounded monthly) GP catch up 75% to LP / 25% to GP for all cashflows thereafter
It may be better to swap preferred return distribution with return of capital distribution in your above scenario for tax purposes. I cannot accurately explain why but our CFO can...
Thanks everyone for responding.
Promote is taking 20% of its half of the JV or 10% of the project. Which I what I consider reasonable.
Knowing the very limited amount of info about the deal that I do, that's very reasonable.
Also, if you have $2m you want to put in multi i have a deal for you.
I dont personally have $2M, but I do have some $ looking to put into multi. If you're trying to raise $ for a deal feel free to send me a PM.
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