A key concept in real estate private equity is the sponsor promote. It’s an industry shorthand for a sponsor’s disproportionate share of profits once a deal clears a predetermined return threshold (preferred return).
In most other alternative investments, this is simply called carried interest.
This article walks through how a typical promote structure works and why they exist.
How the Promote Works
(Real estate sponsors) often invest their own capital alongside their equity co-investors. While a sponsor can choose to subordinate their capital, we’ve observed that it is far more common for sponsors and investors to earn the same returns (pari passu) until the investment reaches the preferred return.
Once the preferred return is met, any profits above that threshold begin splitting disproportionately in the sponsor’s favor. Those excess profits — above what the sponsor would have earned solely on its contributed capital — are the promote.
How Promote Is Structured
Imagine a scenario in which a sponsor contributes ten percent of the total equity required to acquire a property. Outside investors contribute the remaining 90 percent. All capital sits in the same entity, with the sponsors serving as the General Partner (GP) and investors as Limited Partners (LPs).
The distribution structure for this deal follows a “waterfall,” which determines how cash flows are allocated across tiers of performance.
Tier One
100 percent pro-rata to all investors until each has received:
Full return of contributed capital
A ten percent annualized, compounded IRR preferred return
This is the preferred return hurdle.
Tier Two
75 percent to the LPs until each reaches a 20 percent IRR, and 25 percent as promoted interest.
This tier begins the promote. Once the deal clears its preferred return, the sponsor earns 25 percent of all excess profits, above the returns attributable to their own ten percent capital. This split continues until all investors achieve a 20 percent IRR.
Tier Three
60 percent to the LPs and 40 percent to the GP as promoted interest on all remaining net cash.
This is the second promote tier. Above a 20 percent IRR, the sponsor earns 40 percent of excess profits.
However, remember this is a purely hypothetical situation and returns are never guaranteed. To learn more about the waterfall of any particular investments please consult the investment documents.
Why Do Sponsors Earn A Promote?
Investors rely on the sponsor to handle every operational and strategic component of the deal, typically including:
Sourcing assets
Underwriting and identifying value
Competing for and winning deals
Developing the business plan
Negotiating purchase and sale agreements
Managing due diligence
Securing financing
Closing the acquisition
Operating the property
Leasing and renewals
Overseeing capital improvements
Executing the business plan
Disposing of the asset
Given that the sponsor carries the majority execution burden — while investors typically earn a preferred return before any promote is paid — it is reasonable for the sponsor to receive a greater share of profits once the deal surpasses its performance hurdles.
Do Promotes Create Alignment?
A promote is a straightforward incentive: if the sponsor outperforms the original underwriting, they participate more meaningfully in the upside. Investors share in that upside as well, though to a lesser degree.
These structures generally vary by sponsor, deal complexity, and business plan. More operationally intensive or complex projects often carry more favorable promote splits for the sponsor, to reflect the challenges of their role.
Promotes are distinct from any fees a sponsor may charge, such as acquisition fees, asset management fees, or disposition fees.
Crowd Street strives for transparency from sponsors, and promote details appear in the Summary of Terms on each deal page. Before investing, Crowd Street recommends that all members review the sponsor’s promote structure, including tiers, splits, and the presence or absence of any additional promotes.
