INTRODUCTION TO REAL ESTATE JOINT VENTURES FOR FAMILY OFFICES
In the world of real estate investment, family offices often seek innovative and strategic ways to diversify their portfolios and enhance returns. One increasingly popular approach is to engage in real estate joint ventures, particularly with a local expert who possesses the necessary skills and experience to identify, develop, and manage properties that align with the family office's investment criteria. This collaborative model not only leverages the local partner's expertise but also offers an opportunity to share the financial upside through a mechanism known as a "promote." This guide aims to demystify the concept of a promote and discuss its implications from the perspective of a family office investor.
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First Level of Distributions
Initially, profits are shared according to the capital contributions (90% to the financial partner and 10% to the service partner), until each has achieved a 15% Internal Rate of Return (IRR). This means each partner recoups their capital contributions plus a 15% annual return.
Second Level of Distributions (Residual)
Any remaining profits (the "residual") are distributed 72% to the financial partner and 28% to the service partner.
18% or 20% Alternative
If the promote is calculated as 18% of the total residual, the service partner's total share becomes 28% of the residual (10% base share + 18% promote). This calculation ensures that the promote is additive and does not dilute the service partner's base share: (10%×100%)+(18%×100%)=28%(10%×100%)+(18%×100%)=28%
Understanding the Promote Structure
A promote is essentially a performance-based incentive given to the local service partner, allowing them to earn an additional share of the profits generated from the real estate venture. This is over and above what they would normally receive based on their initial equity contribution. It's a way to acknowledge their role in adding value, managing the asset or construction, absorbing a higher share of risks, and uncovering lucrative investment opportunities.
