A carried interest, also known as a promote, is a form of incentive compensation typically used in real estate joint ventures (as well as in other real estate and non-real estate investment vehicles) in order to reward a sponsor for generating profits. The promote is usually structured as an additional share of the profits from the venture after all investors have received distributions fully returning their invested capital, together with some stipulated return on that capital (at an agreed ‘hurdle rate’). (It should be noted there are many variations on the theme, including promotes on operating cash flow prior to return of capital and ‘catch-up’ distributions, that are generally beyond the scope of this article).

Traditionally, a promote is not earned or paid until there is a capital event, such as a sale or refinancing, that generates enough proceeds to provide for the return of capital and the required hurdle return. However, in certain situations, in particular when the business plan of the venture contemplates a long-term hold, the parties may agree that the promote will be earned and paid where the sponsor has created value in advance of the occurrence of a capital event (sometimes referred to as a “crystallized carry” or “crystallized promote”). This article discusses the use of such a crystallized carry structure.

How Promotes are Typically Calculated