Promote Crystallization in Real Estate Joint Ventures | CLE Course

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Course Details

Course Information

smart_display Format
On-Demand
signal_cellular_alt Difficulty Level
Intermediate
work Practice Area
Real Property - Finance

Date & Time

event Date
Tuesday, October 31, 2023
schedule Time
1:00 p.m. ET./10:00 a.m. PT
timer Program Length
90 minutes

Credit Information

This 90-minute webinar is eligible in most states for 1.5 CLE credits.

$347.00

CLE

ALL

This CLE webinar will discuss promote (also known as carried interest) crystallization in real estate joint ventures (JVs). The panel will discuss the benefits of using promote crystallization; the mechanics of promote crystallization, including triggering events, calculating the promote, and how the promote is paid; and negotiating and drafting considerations for promote crystallization provisions.

Faculty

Kathleen M. Mylod

Partner

Dechert LLP

Ms. Mylod is a partner in Dechert’s global finance practice, advising on a range of commercial real estate finance matters. Her clients include private equity and sovereign wealth funds, investment and commercial banks, and large insurance companies across the United States. Her practice focuses on mortgage and mezzanine debt origination; intercreditor, co-lender, and participation arrangements; equity investment and joint venture formation; preferred equity financing; real property acquisition, disposition, and asset management; secondary market acquisition and sales (including mortgage and mezzanine loans); and loan modifications, restructurings, workouts, and enforcement actions. She advises clients investing in various commercial real estate asset classes, whether stabilized or transitional, including hospitality, retail, multifamily, office, and condominium.

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Michael J. Fritz

Partner

Dorsey & Whitney Llp

Mr. Fritz concentrates his practice on commercial real estate capital market transactions and general corporate counseling. He regularly advises national and multinational clients in the commercial real estate industry. Mr. Fritz has over 17 years of experience in handling complex and high-value transactions, such as acquisitions, dispositions, financings, and joint ventures. A large part of his practice is dedicated to representing developers, sponsors, investors, and other capital market participants. Mr. Fritz regularly handles the acquisition, development, and disposition of commercial real estate assets, mortgage and mezzanine financings, preferred equity investments, and the structuring of joint ventures. In his joint venture practice, he focuses on helping his commercial real estate clients structure joint ventures for both single asset and programmatic real estate investment strategies

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Alex Rosenthal

Attorney

Dechert LLP

Mr. Rosenthal has extensive experience in real estate acquisitions and dispositions, joint venture formations, commercial leasing, ground leasing and financing transactions both across the country and internationally. He has successfully represented and advised numerous investors, developers, lenders, owners and tenants on complex matters related to all types of real estate, including office, retail, residential, industrial and hospitality.

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Description

A promote is a form of incentive or profit-sharing mechanism that is often used in real estate JVs to incentivize and compensate the operating partner for creating value in the form of profit generation. Promote mechanics are built into the distribution waterfall provisions of a JV agreement, and these provisions dictate which of the parties will receive cash returns on their investment and the relative priority and timing of the distribution of such returns. The "waterfall" refers to the order in which available cash is distributed to the parties, and the "promote" is embodied in the waterfall.

A promote is often not paid until a capital event occurs that generates net proceeds, usually from a sale or refinancing of the property. Therefore, an operating partner is typically not able to capitalize on its promote unless and until the property is sold or refinanced and the net proceeds are sufficient to achieve the hurdle return.

To address this timing issue, promote crystallization or freezing the promote is increasingly being used in real estate JVs to allow the operating partner to receive or realize its promote without a capital event. If a JV plans to hold multiple assets, the parties must further decide whether to crystallize the promote on an asset-by-asset basis and whether a clawback mechanism is needed.

If the promote is crystallized, the sponsor will receive its promote early in the life of the JV. As such, the promote will not be affected by later poor performance of the JV, changing economic conditions, or other fluctuations which are outside the control of the sponsor.

Listen as our authoritative panel examines the use of the promote crystallization structure and key considerations when drafting the promote mechanics provisions of a real estate JV agreement.

Outline

Overview of the promote crystallization concept in JVs
Typical promote structure
Promote crystallization mechanics
1. Determining the crystallization trigger
2. Promote economics and calculation
3. Liquidity considerations
Benefits of promote crystallization; reasons to include promote crystallization provisions in a JV agreement
Crystallization challenges in the current environment
Tax matters
Practical pointers and key takeaways

Benefits

The panel will address these and other key issues:

What is promote crystallization and how does it work within the context of a JV's distribution waterfall provisions?
When should parties consider including promote crystallization provisions in a JV agreement?
What is the typical promote structure?
What are the mechanics of a promote crystallization?