94 OPPORTUNITY ZONE MAGAZINE | ISSUE 2 • VOLUME 2
CRYSTALLIZATION OF THE PROMOTED INTEREST : A STRATEGY FOR OPPORTUNITY
ZONE SPONSORS
By Marc L . Schultz
Why sponsors should consider negotiating with investors for an election to crystalize the sponsor ’ s promoted interest .
Learn a strategy for how sponsors in the real estate Opportunity Zone space can obtain both early liquidity and minimize their downside valuation risk with respect to the sponsor ’ s “ promoted interest ” over the minimum 10 year holding period required for a transaction utilizing the Opportunity Zone incentive .
WHAT IS A PROMOTED INTEREST ?
In the real estate private equity world , a portion of a sponsor ’ s compensation is typically based upon the sponsor ’ s portion of an increase in value that the sponsor creates in the underlying asset as a result of the sponsor ’ s efforts . This is often referred to as the “ promoted interest ” and is essentially a share of profits that the sponsor obtains from the real estate venture .
Since it is typical to use a partnership for federal income tax purposes to hold real estate assets , Opportunity Zone transactions involving the development of real estate often involved either a limited partnership or limited liability company for both the qualified opportunity fund ( the QOF ) and the qualified opportunity zone business ( the QOZB ).
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