Promote (also called "carry" or "carried interest") is how NYC commercial real estate sponsors earn outsized returns on their capital and operating expertise. The standard structure: LPs get a preferred return first, then sponsor and LP split the remaining returns at agreed splits (typically with the sponsor taking 20-50% on tiered hurdles).
The Waterfall
Cash flow and exit proceeds flow through a "waterfall" of priority distributions. Tier 1: Return of capital to LPs (sometimes including a return of capital with a defined preferred return as one tier). Tier 2: Preferred return to LPs (typically 8-10% IRR or current pay). Tier 3: Sponsor catch-up (sponsor receives 100% until they've received a matching share). Tier 4: Promote / carry split (typically 20% / 80% to sponsor / LP up to a higher IRR hurdle, then 30% or 50% above that).
Preferred Return Hurdles
The preferred return is the LP's priority claim before sponsor promote kicks in. NYC commercial real estate sponsors typically use 8% for core deals, 9% for core-plus, 10% for value-add, and 9-11% for opportunistic (the lower opportunistic pref reflects the higher target IRR). The pref can compound (more LP-favorable) or simple (more sponsor-favorable) — the difference compounds materially over 5-7 year holds.
Catch-Up Provisions
After the LP receives the preferred return, some structures include a "GP catch-up" — the sponsor receives 100% of distributions until they've received an amount equal to a fixed percentage (typically 20%) of all distributions to date. Catch-up provisions are sponsor-favorable; their absence is LP-favorable. NYC opportunistic funds often include 50-100% catch-up; core funds rarely do.
Multiple-Tier Splits
Modern NYC commercial real estate waterfalls often include multiple promote tiers — e.g., 20% sponsor promote between 8% and 14% LP IRR, 30% above 14% LP IRR. The tiered structure aligns sponsor incentives with the higher-end performance — sponsors who don't hit 14% don't see the upper-tier promote. LP-favorable structures use single-tier promote (20% across all returns above pref); sponsor-favorable structures use multi-tier or sometimes "European waterfall" (all promote on a deal-level basis).
- Model the waterfall at base, downside, and severe-downside cases — promote behavior changes dramatically.
- Compounded preferred returns favor LPs over multi-year holds; simple pref favors sponsors.
- Avoid clawback provisions only if you trust the sponsor track record — they're LP-protective.
- Skyline advises NYC commercial real estate sponsors and LPs on waterfall structuring.
Robert Khodadadian and Skyline Properties advise NYC commercial real estate sponsors and LPs on capital structure and waterfall design. The firm has closed $976M+ in NYC commercial real estate. Email info@skylineprp.com for confidential structuring advisory.