The promote sits beneath the platform, and the platform's waterfall runs after it.

A land or development platform has two layers of economics. At the joint venture beneath the platform, the developer holds a minority of the equity and a promote: a share of the gain above a hurdle, paid on the realisation of the parcel it built. At the platform, the manager holds its own share above the platform's hurdle, paid on what the platform realises. The second is calculated on what is left after the first. An investor in the platform reading the memorandum's waterfall reads the platform's, and the platform's waterfall runs on cash that has already paid the developer's promote in the joint venture, under a document the investor did not receive. Two waterfalls run in sequence, and the investor's return is the second's result on the first's remainder. A platform that describes its own waterfall and is silent on the joint venture's has described half of what stands between the parcel's gain and the investor.

This note sets out the two layers and why they exist, the promote's mechanics in the joint venture, the hurdle beneath and the hurdle above, the timing of the two waterfalls, the developer's equity and its treatment, the alignment between the layers, the information the investor receives about the lower layer, the conflicts, the lender at each layer, the onshore interface, a comparison, a worked platform as a type, cases, what each party holds, the sequence, questions, terms and what to read.

The two layers

The platform is the fund's vehicle for a programme of development: a company or partnership that holds interests in joint ventures, one per project, each with a developer. The joint venture is where the parcel is held, the building is built and the sale is made. The developer contributes its work, its local standing and a minority of the equity, and is paid for the work by a development charge and for the result by a promote. The platform contributes the majority of the equity and is paid for the result by the joint venture's distributions, on which the platform's own waterfall runs for the fund's benefit and the manager's. Two layers because two parties with two roles, and two waterfalls because each party's reward is calculated where its contribution was made.

The promote's mechanics

The joint venture's agreement fixes the promote: distributions go first to the equity holders pro rata until their capital is returned, then until a hurdle on it is met, then to the developer by a disproportionate share, a promote, of the remainder, often in tiers that increase the developer's share as the return rises. The promote is paid on the joint venture's realisation, which is the parcel's sale or the building's completion and sale, and the joint venture's agreement says whether interim distributions from pre-sales or refinancing carry a promote. The developer's minority equity receives its pro rata share beneath the promote, and the promote is on top.

Why two waterfalls rather than one

A single waterfall at the platform, paying the developer from the platform's account, would need the developer to be a holder in the platform, with a share of every project rather than of its own. Developers do not want that: each wants its reward on its project, which it controls, and not on projects built by others whose losses would net against its gain. The fund does not want it either: a developer in the platform's register is a related party on every allocation and a voice on every committee. The two-layer structure keeps each developer's economics to its project and the fund's economics to the platform, and the price of that is two waterfalls in sequence and an investor that must read both.

The tiers

A promote in tiers pays the developer a rising share as the project's return rises: a share above the first hurdle, a larger share above a second, a larger still above a third. The tiers reward the developer for outperformance and they are where the joint venture's economics are set, because a developer that negotiates the tiers' thresholds low and their shares high has negotiated a promote that takes most of the gain above a modest return. The platform reads the tiers against the project's business plan: a promote whose second tier begins at the plan's base case return is a promote that pays the developer most of the upside from a project that merely performs as planned.

The catch-up in the joint venture

Some joint venture agreements give the developer a catch-up above the hurdle, so that the developer receives all distributions after the hurdle until it holds its promote share of the gain to date. The catch-up in the joint venture does what the catch-up in the platform does, and it does it first; a joint venture with a full catch-up pays the developer a share of all the gain, not the gain above the hurdle, once the hurdle is cleared. The platform reads the joint venture's catch-up as the platform's own investors would read the platform's, because the arithmetic is the same and the cash leaves before the platform's waterfall sees it.

The hurdle beneath and the hurdle above

The joint venture's hurdle runs on the equity contributed to the joint venture from its contribution dates, at the joint venture's rate. The platform's hurdle runs on the fund's contributions to the platform from their dates, at the platform's rate. The two rates may differ and the two bases do differ: the platform's contributions include what it spent on the platform's own costs, on projects that did not proceed, and on joint ventures that lost, none of which is in any single joint venture's base. A joint venture that clears its hurdle and pays a promote may sit in a platform that has not cleared its hurdle, and the developer is paid before the fund's investors have their hurdle. That is the structure's arithmetic, and the investor reads both hurdles to know it.

The realisation definition

Both waterfalls run on realisation, and the two documents define it. The joint venture's agreement says whether realisation is the sale of the completed building, the sale of the parcel before completion, a refinancing that returns equity, or the transfer of the joint venture's shares; the platform's document says when a joint venture's distribution is a realisation for the platform's unit. A joint venture that treats a refinancing as a realisation pays the developer its promote on borrowed money, and the platform receives a distribution that is debt at the lower layer; the alignment terms say that a refinancing carries no promote unless the platform's test would pass on it. The two definitions are drafted to match, and where the onshore regime's companies law fixes what a distribution is, the definitions are drafted within it.

Timing

The joint venture realises when its project sells; the platform realises as its joint ventures distribute. A platform with five joint ventures realises five times, and its whole-fund waterfall, if that is its unit, pays the manager when the platform's cumulative account is in credit; its deal-by-deal waterfall pays on each joint venture's distribution. The developer's promote, by contrast, is always paid by the joint venture, at that project's realisation, and does not wait for the platform's account. The developer is paid deal by deal by construction, whatever the platform's unit, and the platform's own clawback apparatus does not reach the developer because the developer is not a party to the platform's document.

The developer's equity

The developer's minority equity in the joint venture is contributed in cash, or in kind by the contribution of the parcel or of work, and the joint venture's agreement values it. Equity contributed in kind is valued at an agreed figure that sets the developer's share of the joint venture's capital and of its hurdle base, and a figure set high gives the developer a larger share of the capital return and a larger hurdle base at the platform's expense. The platform reads the in-kind valuation as an economic term of the joint venture, because it is, and the valuer that supports it is the platform's appointment.

The development charge beside the promote

The developer is paid twice: a development charge for its work during construction, as a cost of the joint venture, and a promote for the result at realisation. The charge is a percentage of construction cost or a fixed sum by phase, and it is paid whether or not the project makes a gain. The platform reads the charge's level as an economic term because it is a cost that reduces the gain both waterfalls share, and a charge set high with a promote set low is a developer paid for work rather than result, which changes what the developer cares about. The usual settlement is a charge that covers the developer's cost of doing the work and a promote that rewards the result, and the committee reads the two together.

The in-kind contribution and the onshore register

A developer that contributes the parcel in kind transfers it to the joint venture company, and the transfer is an onshore event with the onshore regime's approval, transfer cost and registration. The figure at which the parcel enters the joint venture's capital account is a term of the shareholders' agreement, and the figure at which the registry records the transfer is the regime's, and the two may differ where the regime values for its own purposes. The valuer's report supports the first, and counsel in the jurisdiction handles the second. A joint venture whose capital account carries one figure and whose registry carries another has two valuations of one parcel, and the committee reads why.

Alignment between the layers

The platform's document and the joint venture's agreement are drafted together or they are drafted apart, and apart is the usual outcome because the joint ventures come after the platform's close. Alignment means that the joint venture's hurdle rate is at or above the platform's; that interim distributions in the joint venture carry a promote only if the platform's interim test would pass on them; that the developer's promote is computed net of the platform's share of the joint venture's costs; and that the joint venture's realisation definition matches the platform's. A joint venture drafted on the developer's template is aligned to the developer.

The information the investor receives

The investor in the platform receives the platform's reporting: its account, its waterfall computation, its valuation. It receives, about the joint ventures, what the platform's document says it receives, and a document that promises the platform's accounts only gives the investor the joint ventures' distributions without the promote computation that produced them. An investor that wants to know what the developer was paid, and on what hurdle, needs the joint venture's waterfall computation, which the platform holds as a party and may disclose. A platform that reports the promote paid in each joint venture alongside its own waterfall has told its investors what stood between the parcel's gain and them.

The conflicts

The manager of the platform negotiates each joint venture's agreement with the developer, and may have a relationship with the developer beyond this platform: a share in the developer, a co-investment beside it, a second platform with it. A promote negotiated generously by a manager with an interest in the developer is a related-party term, and the platform's committee reads it. An affiliated developer is the sharpest case, and the platform's document names it, fixes the approval and provides for the reporting.

The lender at each layer

The joint venture borrows construction finance against the parcel and the building, and its lender ranks ahead of all equity, the developer's and the platform's alike; the promote is paid from what the lender leaves. The platform may borrow against its interests in the joint ventures, and its lender reads each joint venture's agreement for the distributions the platform will receive after the promote, because that is its borrower's cash. The two lenders do not share security, and the joint venture's lender's consent to the platform's charge over its interest is a term the joint venture's agreement addresses.

The onshore interface

In a register jurisdiction the joint venture is an onshore company holding the parcel, with the developer and the platform's onshore holding company as shareholders, under that jurisdiction's companies law and its foreign ownership rules. The promote is a distribution preference in the onshore company's constitution or a contractual right in the shareholders' agreement, and each regime treats the two differently: a preference in the constitution binds the company and appears on its register; a contractual right binds the shareholders and is paid by an adjustment among them. Counsel in the jurisdiction says which the regime's companies law permits and which the registrar will file, and the promote is drafted in the form the regime recognises.

By term · by layer	In the joint venture	In the platform	Who reads the two together
Who is rewarded	The developer, by promote	The manager, by carry	The platform's committee
Hurdle base	Equity contributed to the joint venture	The fund's contributions to the platform	The administrator
Hurdle rate	The joint venture's	The platform's, at or below	Counsel, at alignment
Timing	On the project's realisation	On the platform's account or each distribution	The investor
Clawback	Usually none	The platform's apparatus	Counsel
In-kind equity	Valued by agreement, supported by a valuer	Read as an economic term	The committee
Interim distributions	By the joint venture's agreement	By the platform's interim test	Counsel, at alignment
Reporting	The joint venture's computation, to the platform	The platform's computation, to the investor	The manager

A platform, as a type

A fund forms a development platform in a register jurisdiction with a whole-fund waterfall, an interim test and an escrow. The platform enters three joint ventures with three developers, each an onshore company holding one parcel, each with a promote in tiers above a hurdle at the platform's rate, each with in-kind equity supported by the platform's valuer, each with interim distributions carrying a promote only on a test matching the platform's. The platform's document names the second developer as an affiliate of the manager and the committee approves its joint venture's terms. Each joint venture's construction lender ranks ahead of the equity. The first project sells in year four; its promote is paid in the joint venture; the distribution reaches the platform net of it; the platform's account is not yet in credit and the manager is paid nothing. The platform's report shows the promote paid and the platform's waterfall on the remainder. The third project sells in year seven; the platform's test is met; carry is distributed and escrowed. The investor read two waterfalls and received the second's result on the first's remainder, as the memorandum said it would.

The structure paper's page

The structure paper carries a page on the two layers: the platform's waterfall and unit, the alignment terms every joint venture must carry, the form of the promote in each onshore regime the platform will enter, the in-kind valuation procedure, the related-party developer's approval, the reporting of promote beside carry, and the ranking at each layer. The page is written before the platform's close because the alignment terms go into the platform's document, and it is the page the manager takes to each developer's negotiation.

The exposure the investor holds

An investor in the platform holds units in a vehicle whose assets are interests in joint ventures, and its exposure to any parcel is through two documents and two waterfalls. It does not hold the parcel, it does not hold the joint venture, and it cannot instruct either; it holds the platform's units and the platform's reporting. That is the structure the land door describes, and the promote is the term in the lower layer that most changes what the upper layer receives. An investor that reads the promote has read the exposure; one that reads the platform's rate has read a number whose base the promote set.

The second platform's reading

A manager raising a second platform has a first whose joint ventures ran their waterfalls and whose investors saw what the promotes took. A first platform whose promotes were reported beside its carry, whose in-kind figures were supported, and whose developers were paid on hurdles at the platform's rate is a record the second platform's anchor reads; one whose investors learned the lower layer's terms from distribution sizes is a record too. The alignment terms in the second platform's document are the first platform's lesson, and the developers that built the first read them before they sign the second.

Four cases, as types

A platform's memorandum describes the platform's waterfall only. The first joint venture realises, its promote is paid on its own hurdle at a rate below the platform's, and the investor learns from the distribution's size that a waterfall it never saw ran first.

A joint venture's agreement is drafted on the developer's template and permits promote on interim distributions from pre-sales. The developer is paid its promote from pre-sale deposits before the building is complete, the building is delayed, and the platform's investors hold a project whose developer has been paid for a result not yet produced.

A developer contributes a parcel in kind at a figure the manager accepted without a valuer. The developer's share of capital and hurdle base is set on that figure, the project's sale produces a gain, and the platform's share of it is smaller than the equity it contributed would have earned at the parcel's supportable value.

A platform's document fixes the alignment terms for every joint venture, names the affiliated developer, reports each promote, and appoints the valuer for in-kind equity. Each joint venture's waterfall runs as the platform's document said it would, and the investor's reading of two waterfalls was the reading the memorandum gave it.

What each party holds

The manager holds the platform's document, the alignment terms it imposes on each joint venture, the negotiation of each promote and the reporting of it.

The developer holds the joint venture's agreement, its minority equity, its promote and its development charge.

Counsel holds the two documents' alignment and the onshore form of the promote.

The committee holds the approval of related-party joint ventures and the reading of each promote computation.

The valuer holds the in-kind equity's figure.

The administrator holds the platform's waterfall on the distributions net of promote.

The lenders hold their ranking at each layer.

Where it surfaces

It surfaces at the first joint venture's negotiation, when the developer's template arrives with a hurdle the platform's document did not anticipate. It surfaces at the in-kind contribution, when the developer's figure for the parcel is the first number in the joint venture's capital account. It surfaces at the first pre-sale, when the joint venture's agreement permits an interim distribution and the developer asks for its promote. It surfaces at the first realisation, when the platform's investors see a distribution smaller than the project's gain implied. It surfaces at the committee, when the second developer is found to be the manager's affiliate. And it surfaces at the platform's end, when the investor's return is the second waterfall's result on the first's remainder, and asks what the first took.

The cost of getting it wrong

A platform whose joint ventures pay promote on hurdles below its own has paid developers before its investors were whole on the projects the developers built. A joint venture that pays promote on pre-sale deposits has paid for a result not produced, and the platform cannot recover it. An in-kind figure without a valuer has given the developer capital and hurdle base at the investor's expense. And a platform that reports only its own waterfall has investors who learn the lower layer's terms from the distribution's size. Each cost was set in a joint venture document negotiated after the platform's close, under pressure from a developer that had the parcel and the platform that needed it, and the alignment terms in the platform's document are what let the manager say no.

The committee's reading

The committee reads each joint venture's agreement before it is signed for the alignment terms, the in-kind figure and its valuer, the tiers against the business plan, the interim distribution test and the development charge. It reads related-party joint ventures as approvals. And it reads each realisation's promote computation beside the platform's own computation, because the two together are what the investor received. A manager that presents each joint venture with the alignment terms ticked, the valuer's report and the business plan has a committee that reads in a sitting.

A timeline, as a type

At the platform's close the document carries the alignment terms and names the manager's affiliated developer. In year one the first joint venture is negotiated within the terms, the developer's in-kind parcel is valued by the platform's valuer, and the promote is drafted as a contractual right among the shareholders because the onshore regime's companies law does not file preferences. In year two the second joint venture, with the affiliate, is approved by the committee on terms no better than the first's. In year three the first project pre-sells; the interim distribution test is not met; no promote is paid. In year four the first project completes and sells; the joint venture's waterfall pays the promote; the platform's account is not in credit; the platform's report shows the promote and the platform's computation. In year seven the third project sells; the platform's test is met; carry is distributed and escrowed; and the investor's return is what the memorandum's description of two waterfalls implied.

The sequence

1. The platform's document fixes the alignment terms every joint venture must carry: hurdle rate, interim distribution test, cost netting, realisation definition, in-kind valuation by the platform's valuer.
2. Each joint venture is negotiated within them, and a related-party developer's joint venture is approved by the committee.
3. The promote is drafted in the form the onshore regime recognises, as a preference or a contractual right.
4. Each joint venture's construction finance is arranged with the promote beneath the lender.
5. Each realisation runs the joint venture's waterfall, and the platform's waterfall runs on the remainder.
6. The platform reports each promote beside its own computation.

Questions a manager asks

Should the joint venture's hurdle match the platform's. At or above; a joint venture's hurdle below the platform's pays the developer before the investor's hurdle is met on that project's share.

Can the promote be deferred to the platform's realisation. By agreement, and developers resist it, because their reward is the project's; a deferred promote is usually priced higher.

Is the development charge part of the economics. It is the developer's payment for work and it is a cost of the joint venture that reduces the gain the promote and the platform's waterfall share; the committee reads its level.

What if the developer holds across several joint ventures. Each joint venture's promote is its own unless the agreements cross-collateralise, and a cross-collateralised promote is a platform-level term the investor reads.

How is the promote reported. In the platform's report, per joint venture, with the computation, beside the platform's own waterfall.

Does the platform's clawback reach the developer. No; the developer is a party to the joint venture only, and a clawback of the promote is a joint venture term, rare and resisted.

Terms used

Platform: the fund's vehicle holding interests in development joint ventures.

Joint venture: the onshore or intermediate company holding one project, with the developer and the platform as holders.

Promote: the developer's disproportionate share of the joint venture's gain above a hurdle.

Development charge: the developer's payment for its work, a cost of the joint venture.

In-kind equity: the developer's contribution of the parcel or of work, valued by agreement.

Alignment terms: the platform's document's requirements for every joint venture's economics.

What to read

The platform's constitution and memorandum; each joint venture's shareholders' agreement and constitution; the alignment terms; the valuer's report on in-kind equity; the construction facility's ranking. On this site, the developer and platform rooms under Land and the economics room under Structures.