A key term to a real estate private equity deal is the sponsor promote. This term is industry jargon for the sponsor’s disproportionate share of profits in a real estate deal, generally above a predetermined return threshold.
Real estate sponsors usually invest their own capital into a deal alongside their equity co-investors. While it is possible for sponsors to subordinate their own capital to that of their investors, it is typical that they earn the same returns as the other equity investors until they reach a certain return threshold, known as the preferred return.
Above the preferred return, sponsors will begin to divide excess profits disproportionately in their favor. This amount of money paid to the sponsor above the amount earned on their contributed capital to the deal is the promote.
Why does the sponsor have a promote?
The sponsor promote can incentivize sponsors to exceed expectations and beat the original pro forma or business plan. If a sponsor exceeds expectations, their bonus can come in the form of the promote. Equity investors may also share in those additional profits, but to a lesser degree. At the same time, sponsor promote may result in sponsors taking on additional risk to help achieve those outsized returns. Though all investments carry risk, this additional risk may ultimately be detrimental to investors in the deal.
Note: The promote is separate and distinct from fees that a sponsor may earn in a deal, which can include acquisition fees, asset management fees and, potentially, disposition fees.
For more information on the sponsor promote, check out this article: What is a Real Estate Sponsor Promote?