CRE glossary
GP Promote (Carried Interest)
The GP promote (also called carried interest) is the outsized share of a deal's profits that the general partner earns once limited partners have received their preferred return and, typically, their capital back. It is performance-based compensation disproportionate to the GP's small equity contribution — e.g., a 20% promote paid on capital that may represent only 5–10% of the equity.
Formula
GP Promote = Promote % × Distributable Profits Above the Applicable Hurdle
How the GP Promote Works in an Equity Waterfall
The promote is paid through a distribution waterfall — a set of ordered tiers that governs how cash flows split between limited partners (LPs, the passive capital) and the general partner (GP, the sponsor). Cash first returns the preferred return and return of capital to LPs; only profits above those hurdles are 'promoted' to the GP at a rate richer than its pro-rata ownership. This aligns incentives: the GP earns meaningful upside only after investors clear their required return.
- •Return of capital: LPs receive 100% of contributed equity back.
- •Preferred return (pref): LPs receive a priority return, commonly 8% per year, before any promote is paid.
- •GP catch-up (optional): the GP receives a burst of cash — often 50–100% — until it has 'caught up' to its target promote share of profits.
- •Promote / carry tiers: remaining profits split at the promote rate (e.g., 80/20 to LP/GP), sometimes stepping up (e.g., to 70/30 or 60/40) as IRR hurdles are cleared.
Why the Promote Matters
The promote is the single largest driver of GP economics and the sharpest point of LP negotiation. Because it is paid on profits above a hurdle, its dollar value is highly sensitive to deal performance, hold period, and the exact hurdle definition — a difference of one percentage point in the pref, or whether the pref compounds, can move GP proceeds materially. It also determines alignment: a promote structured with a genuine pref and clawback rewards the GP for real outperformance rather than for simply deploying capital.
- •Promote rates typically range 10–30%, with 20% the market convention for a single-tier structure.
- •Multi-tier ('waterfall') promotes escalate the GP share as LP IRR hurdles (e.g., 8% / 14% / 18%) are met.
- •'Carried interest' is the same concept borrowed from private equity; in CRE the terms are used interchangeably.
Common Pitfalls and Nuances
Promote math is deceptively easy to get wrong because the details of the hurdle definition change the answer. Whether the preferred return is cumulative vs. non-cumulative, compounding vs. simple, calculated on an IRR basis vs. a return-on-capital basis, and whether a catch-up is full or partial all reshape the split. A promote is only as trustworthy as the calc engine behind it.
- •Catch-up confusion: a '100% catch-up' means the GP takes all cash in that tier until it reaches its promote %, not that it takes everything.
- •IRR hurdle vs. pref: an IRR-based hurdle accounts for the timing of cash flows; a simple pref does not — they can diverge sharply on long or lumpy holds.
- •Clawback: absent a clawback provision, a GP paid promote on early distributions can keep it even if later losses leave LPs short of their pref.
- •Whose capital: GPs often co-invest a small slice; promote is earned on top of, and disproportionate to, that co-invest.
Worked example
Consider a deal with $10M of LP equity, an 8% cumulative preferred return, a 100% GP catch-up, and a 20% promote, generating $16M of total distributable proceeds over a 5-year hold. Tier 1 — Return of capital: LPs receive their $10M back, leaving $6M. Tier 2 — Preferred return: LPs accrued roughly $4.0M of 8% pref over the hold and receive it, leaving $2.0M. Tier 3 — GP catch-up: the GP takes cash until it holds 20% of profits distributed above return of capital; here it receives about $1.0M, leaving $1.0M. Tier 4 — Residual split (80/20): LPs get $0.8M, GP gets $0.2M. Total GP promote ≈ $1.0M + $0.2M = $1.2M, earned on profit the GP did not contribute pro-rata capital for.
Frequently asked questions
- What is a good GP promote?
- There is no universally 'good' number — it is a negotiation between risk and reward. A 20% promote over an 8% preferred return is the market-standard baseline for a single-tier CRE deal. LPs generally accept a higher promote (25–30%) only when it sits behind higher IRR hurdles, so the GP earns the richer split only for genuine outperformance. What LPs scrutinize most is the hurdle definition — a real, cumulative, compounding pref with a clawback matters more than the headline percentage.
- What is the difference between promote and carried interest?
- In commercial real estate they mean the same thing: the GP's disproportionate share of profits above a hurdle. 'Carried interest' is the private-equity term (and the one used in tax discussions), while 'promote' is the traditional CRE term. Both describe performance-based compensation paid to the sponsor on profits it did not fund pro-rata.
- Is the GP promote paid before or after the preferred return?
- After. The preferred return is a priority hurdle — LPs must receive their accrued pref (and usually their return of capital) before the GP earns any promote. Only profits above that hurdle are promoted to the GP. This ordering is exactly what the distribution waterfall enforces, tier by tier.
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