What is a “double-promote” joint venture equity partnership structure? In short, a very lucrative opportunity for an investment’s local owner/operator/developer Sponsor. It can occur when the Sponsor of the project is in fact comprised of two separate parties who have a profit partitioning waterfall agreement between the two of them, and this “Top-Level” (two-party) Sponsor also has a separate profit partitioning waterfall agreement with the project’s Third Party (majority equity) Investor. An example of a two-party Sponsor would be a local owner/developer and an insurance company that pursues and makes investments with that owner/developer.
As shown in the diagram above, Waterfall #2 is simply a splitting up of those net cash flows (pre-tax profits) that are allocated to the “Top-Level” Sponsor in Waterfall #1. In Waterfall #1, the “Top-Level” Sponsor would receive a promoted profit sharing interest (“promote”, or additional share of net cash flows beyond their pro-rata equity ownership share) from the Third Party Investor, and additionally, the “Sponsor” itself would receive a promoted profit sharing interest from their Partner in Waterfall #2.
Thus the term double-promote, because the local owner/operator/developer Sponsor is promoted twice: once as part of the “Top-Level” Sponsor entity, and again by the Partner. The amount of the promotes at each Tier (range of investment performance) in Waterfall #1 are negotiated by the “Top-Level” Sponsor entity and the Third Party Investor, as are the unique amounts at each Tier in Waterfall #2 (negotiated separately among the Sponsor and Partner).
Want to know more and see how these are actually modeled in Excel? Join us on this coming Wed 12/7 and Thurs 12/8 for our acclaimed JV Partnership Modeling Bootcamp Interactive Webinar!