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Promote Mechanics in Real Estate Joint Ventures

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In real estate joint ventures, the promote structure is a common mechanism used to incentivize and reward the efforts of the operating partner or sponsor. The promote, also known as the carried interest or profit share, is a share of the profits that the operating partner receives above a predetermined threshold. Here, we will explore the mechanics of a promote structure in joint ventures and discuss its benefits for all parties involved.

The promote structure is typically structured as a waterfall distribution, where profits are distributed in a specific order and priority. The first step in the waterfall is often the return of the initial capital contributions to the partners. Once the capital is returned, the remaining profits are distributed according to the agreed-upon promote structure.

The promote structure typically consists of two components: the hurdle rate and the promote percentage. The hurdle rate is a predetermined rate of return that the project must achieve before the promote kicks in. Therefore, the investor will need to receive all of their initial capital before the first promote occurs. It serves as a benchmark to ensure that the project generates sufficient profits to justify the promote. The promote percentage is the share of profits that the operating partner receives above the hurdle rate.

For example – if an operating partner has a 10% equity interest and capital investment in the joint venture, then the operating partner may be entitled to receive about 20% of the distributions after the capital partner receives their applicable hurdle return.

The promote structure provides several benefits for all parties involved in the joint venture. For the operating partner, it serves as a powerful incentive to maximize the project's profitability. By aligning the operating partner's interests with the success of the project, the promote structure encourages the operating partner to make strategic decisions, take calculated risks, and actively manage the project to achieve returns.

The promote structure also benefits the passive partners or investors. By offering a promote to the operating partner, the joint venture can attract experienced and skilled partners who have a vested interest in the project's success. The operating partner's expertise and track record can significantly enhance the project's chances of success and generate higher returns for all partners.

Furthermore, the promote structure can help mitigate conflicts of interest between the operating partner and the passive partners. Since the operating partner's compensation is tied to the project's performance, they have a strong incentive to act in the best interests of all partners and make decisions that maximize the project's profitability. This alignment of interests can foster trust, transparency, and collaboration among the partners, leading to a more productive working relationship.

It is important to note that the mechanics of a promote structure can vary depending on the specific terms and agreements of the joint venture. The hurdle rate, promote percentage, and other factors can be negotiated and customized to suit the unique needs and goals of the partners.

Overall the promote structure is a valuable mechanism in real estate joint ventures that incentivizes and rewards the efforts of the operating partner. By aligning the operating partner's interests with the success of the project, the promote structure encourages strategic decision-making, risk-taking, and active management. It also benefits the passive partners by attracting experienced partners and mitigating conflicts of interest. With careful negotiation and customization, the promote structure can create a win-win situation for all parties involved, driving the success and profitability of the joint venture.

KI Legal’s Transactional attorneys are well versed in these matters and are prepared to help guide you through the process. For more information on promote structures, or for help with your particular real estate venture at hand, contact us at (212) 404-8644 or email to discuss.

This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.


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