This might open up a whole new world of opportunities for investors who might not have the ability to invest in certain asset classes otherwise. In this situation, the investors get the benefits of commercial real estate ownership (think tax benefits, as you own the real estate directly) without having to make a potentially very large purchase on their own. Syndication is when an investor or company (sometimes known as the “syndicator” or “sponsor”) sources an investment opportunity, and then pools capital with other investors with similar investment objectives in order to buy that commercial real estate asset. The syndication process is not a new one-it actually stretches back hundreds of years. So in the context of the Sponsor providing all of these services, and incentivizing the Sponsor to deliver excellent returns to investors, the Promote is an incredibly powerful tool.īelow is an example of a commercial real estate waterfall, followed by an explanation of relevant terms:
Further, the Promote rewards the Sponsor for the work that they do for the partnership from acquisition through disposition, including underwriting the deal, negotiating contracts, securing financing, completing due diligence, developing business plans, managing leasing, capital projects, and investor reporting, and finally, disposing of the asset. First, and easiest to explain, is that a Promote encourages the Sponsor to source potential commercial real estate acquisition targets, and then identify ways to unlock value for all parties involved in the deal. This concept, in many other industries, is often described as a “Carried Interest”.īy this point, alarm bells might be going off in your head, and you could be asking yourself, “Wait a minute…Why should the Sponsor get a Promote on a commercial real estate investment if the limited partner(s) put up the majority of the equity needed for the investment?” That is a great question, that we would answer by discussing the roles and responsibilities of the Sponsor, as well as incentivization’s of all parties involved in the deal. While the concept of a Promote is critical within a commercial Real Estate private equity opportunity and structuring, Promote is simply a commercial Real Estate industry term to describe the Sponsor, or General Partner’s, disproportionate share of the actual profits realized above one or more agreed upon internal rate of return (IRR) or equity multiple (EM) thresholds.
As an example, if one investor puts in 60% of the equity in a deal, and another contributes 40%, then the Pari Passu structure would dictate that profits would be split on equal footing, or 60% to the first investor, and 40% to the latter.
#Real estate lingo pro#
Alternatively, in a commercial real estate investment setting, Pari Passu would mean that investors will receive their pro rata distribution dependent on their respective investment amount. In the context of financing or lending, Pari Passu would mean that multiple lenders have equal claims to the assets used to secure a loan.
In real estate, this phrase can have several different meanings depending on context, but in every setting, it ultimately means that two or more investors, lenders, assets, or obligations will be treated equally. Pari is the Latin word that eventually produced the English word “Parity”, and Passu means “step”. Pari Passu is a Latin phrase that literally means “with even step” but translates something like “on equal footing”, “ranking equally” or “moving together”.
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