From the course: Structuring a Construction Loan
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Promote structures in real estate development
From the course: Structuring a Construction Loan
Promote structures in real estate development
- [Instructor] Earlier in this course, we spent a good deal of time talking about fees, and in particular, assessing the fees for balance to ensure the developer has hard cash in the deal at all times, as well as looking to the profit sharing and promoted interest of the developer to look at the developer's incentives. We mentioned before that this is more of a negotiation between the developer and their equity partners, but it is important for the lender to also assess the structure. For example, it would be risky to have a promoted interest that encourages the developer to take big risks in the hopes of a big win. So what is a promoted interest? Developers and their capital partners will enter into partnership agreements that assign management responsibilities and allocate profit and risk. The terms governing the distribution of partnership cash flows, net of costs typically require a preferred return on invested capital. Once the preferred return threshold has been met, residual…
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