What is a Clawback in Real Estate Financial Modeling?
What is a Clawback?
A clawback in real estate financial modeling refers to a contractual provision that allows investors or sponsors to recover previously distributed profits or fees if certain financial performance targets are not met. It is often included in waterfall structures and promote structures to ensure fairness in profit-sharing.
Types of Clawbacks in Real Estate
- Investor Clawback (LP Clawback)
- If an investment fails to achieve a targeted return (e.g., an IRR hurdle), the sponsor (GP) may be required to return some or all of their promote (carried interest) to the investors (LPs).
- Ensures that the sponsor doesn’t get overcompensated if early distributions were made based on strong initial returns but the overall investment underperforms.
- Sponsor Clawback (GP Clawback)
- In a fund structure, where the sponsor receives a performance fee (promote) across multiple deals, a clawback ensures they don’t receive excessive fees from early deals while later deals underperform.
- Typically calculated at the end of the fund’s life to ensure alignment between sponsors and investors.
- Developer Clawback
- In joint ventures, if a developer is entitled to a development fee but the project underperforms, they may need to return part of the fee to investors.
Why It Matters
- Protects investors from overpaying for early profits.
- Ensures sponsor alignment with the overall performance of the investment.
- Common in private equity real estate funds, joint ventures, and promote structures.
