Real Estate Promote (Carried Interest), Explained

A real estate promote — also called carried interest — is the share of profit a GP earns above its capital contribution. In a standard 80/20 structure the GP takes 20% of the profit that remains after LP capital and the preferred return are paid. Run the equity waterfall above and the GP earns a $120,000 promote — on a deal where it contributed no LP capital.

The promote is the performance incentive at the heart of the GP/LP relationship. The sponsor sources the deal, arranges the financing, and runs the asset; the promote is how it gets paid for doing that well. Critically, it sits in the last tier of the waterfall — the GP earns nothing until the LP has its capital back and its preferred return in hand. That ordering aligns incentives: the GP's upside only exists above the return the LP earns first.

In the worked structure, $600,000 of residual profit splits 80/20, sending $120,000 to the GP. That the sponsor earns it without putting up LP capital isn't a loophole — it's the deal. The capital takes the priority position and the pref; the sponsor takes the tail-end upside for execution. Both sides win only if the deal performs.

Real promotes are often richer than a single 20% split. A multi-tier promote steps the GP's share up as returns climb — say 20% of profit to a 12% IRR hurdle, then 30% above it. Each tier pays the sponsor more for stronger results, sharpening the incentive on the upside. For the precise mechanics of how the promote tier is calculated, see the waterfall promote glossary entry.

Worked example — 20% promote above the pref

The discipline: the GP earns its $120,000 promote only from profit above the LP's pref — performance pay, not a capital return.