Calculating a real estate promote
A worked example with sponsor co-investment, a pref and a promoted split.
How is a real estate promote calculated?
Distributions typically return capital to all equity pro rata, then pay a preferred return pro rata, then split remaining profit so the sponsor receives a promote — a share of profit above its equity stake — often in tiers tied to IRR or multiple hurdles.
The example
Equity is $10.0m: LPs $9.0m (90%) and the sponsor $1.0m (10%). The deal returns $18.0m. Pref of $3.0m has accrued. Above the pref, 20% goes to the sponsor as promote and 80% is shared pro rata. Figures illustrative; real deals usually have IRR-based tiers.
- Return of capital: LPs $9.0m, sponsor $1.0m; $8.0m remains.
- Preferred return ($3.0m, pro rata): LPs $2.7m, sponsor $0.3m; $5.0m remains.
- Promote (20%): sponsor $1.0m.
- Pro-rata share of the 80% ($4.0m): LPs $3.6m, sponsor $0.4m.
LPs receive $15.3m (1.70x on $9.0m); the sponsor receives $2.7m (2.70x on $1.0m, including the promote). Total $18.0m.
Multi-tier promotes
Common structures step the promote up as hurdles are met — for example 20% above an 8% IRR and 30% above 15%. Each tier needs IRR calculated from actual cash-flow dates.
Where it goes wrong
Hurdles measured on the wrong cash flows, sponsor co-investment treated inconsistently, and catch-ups that aren't in the document. Model from the operating agreement.
| Tier | LPs | Sponsor | Remaining |
|---|---|---|---|
| Start | $18.0m | ||
| Return of capital | $9.0m | $1.0m | $8.0m |
| Preferred return | $2.7m | $0.3m | $5.0m |
| Promote (20%) | $1.0m | $4.0m | |
| Pro-rata 80% | $3.6m | $0.4m | $0.0m |
| Total | $15.3m | $2.7m |
Questions
Is a promote the same as carried interest?
Economically similar; 'promote' is the real estate term.
Can FUN/D run multi-tier promotes?
Yes, per deal or per fund.
Related reading
Promote · Real estate fund software · How distribution waterfalls work
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