1. What is Carried Interest in Real Estate?

Carried interest, also known as "promote," is the share of profits that real estate sponsors or general partners receive after investors have received their preferred return. It's a key component of real estate partnership structures.

2. How Does the Calculator Work?

The calculator uses the Carried Interest formula:

Where:

• \( Profits \) — Total profits from the real estate investment
• \( Preferred\ Return \) — Minimum return guaranteed to investors before sponsor participates
• \( Promote\ \% \) — Percentage of profits above preferred return that goes to sponsor

Explanation: The calculation determines how much of the profits above the preferred return threshold will be allocated to the sponsor as carried interest.

3. Importance of Carried Interest Calculation

Details: Accurate carried interest calculation is crucial for structuring real estate partnerships, aligning sponsor and investor interests, and determining fair profit distributions.

4. Using the Calculator

Tips: Enter total profits and preferred return in USD, and promote percentage as a whole number (e.g., 20 for 20%). All values must be non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What is a typical promote percentage?
A: Promote percentages typically range from 10% to 30%, depending on the deal structure and market conditions.

Q2: What is a common preferred return rate?
A: Preferred returns typically range from 6% to 10% annually, though this varies by market and risk profile.

Q3: When is carried interest paid out?
A: Carried interest is usually paid after investors receive their preferred return and often after return of their capital.

Q4: Are there different types of promote structures?
A: Yes, common structures include European (single promote) and American (tiered promote) waterfalls.

Q5: Is carried interest taxed differently?
A: In many jurisdictions, carried interest may receive favorable capital gains tax treatment rather than ordinary income treatment.