The Promote’s guide to the CRE terms you absolutely need to know – complete with handy examples from the arena.
The Promote: The cherry-on-top profit participation that the general partner (GP) or sponsor earns above their initial equity contribution, typically after the deal crosses a predetermined “hurdle rate.” It is the GP’s reward for sourcing, operating and executing a successful deal.
How It Works:
LPs receive their initial investment back plus a preferred return (often 6-8%)
Once this hurdle rate is met, the GP takes a bigger share of the remaining profits. Commonly structured as an 80/20 split favoring LPs until hurdle is met, then 50/50 or 70/30 split thereafter.
Bigger and more sophisticated LPs will often strike a hard bargain on the promote, often negotiating promote terms, hurdle rates, and catch-up provisions. Smaller and more unsophisticated LPs may not have the leverage or expertise to do so.
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CAGR: Compounded Annual Growth Rate averages out the returns on an investment over the duration of the investment. A good way to gauge the performance of investments in which the cash flows on the property are volatile year-to-year. Think of CAGR as a way to smoothen them out to give you the overall picture.
Cap Rate: The most common way in CRE to gauge the value of an income-producing piece of real estate. If you hear random Marcus & Millichap brokers wax eloquent on “cap rate compression,” you’ll now know what it means. The more in-demand an asset in general, the lower the cap rate.
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Cap rate = Stabilized annual NOI/Price