Removal clauses differ in three things: whether the promote survives, how the sponsor's capital interest is valued, and whether that value is discounted, and each is worth a different amount.
Removing a JV sponsor costs whatever the removal clause pays it, and the way to price that is to run the venture's waterfall at a deemed liquidation value and then apply the clause. On an illustrative 90/10 venture appraised at 320 against a 150 loan in year 3, net equity is 163.60 and the sponsor's promote is 9.47. Removal without cause pays the sponsor 24.89; removal for cause with the promote forfeited pays 16.36 or 15.41 depending on how its capital is valued, and 11.56 if that capital is also discounted by 25 per cent.
Worked in full in Real Estate Joint Ventures by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Removal clauses are negotiated as words: for cause, without cause, forfeiture, fair value, discount. Underneath they decide three numbers. Does the sponsor keep the promote it has earned to date? Is its capital interest valued pro rata to the capital it contributed, or as the share the waterfall would pay that capital? Is that value then discounted? Each choice moves money between the partners, and the only way to see how much is to compute the waterfall at the value the clause uses, usually an appraisal less deemed sale costs.
| Input | Value |
|---|---|
| Equity contributed: investor 90%, sponsor 10% | 100.0 |
| Years since closing; distributions to date | 3; none |
| Appraised value | 320.0 |
| Loan outstanding | 150.0 |
| Deemed sale costs | 2% |
| Tier 1: pro rata to an 8% IRR | pro rata |
| Tier 2: to an investor 12% IRR, 20% promote | 80/20 |
| Tier 3: above, 30% promote | 70/30 |
| Discount on capital in the harshest variant | 25% |
1. Deemed net equity = 320.0 × (1 − 2%) − 150.0 = 163.60.
2. Tier 1 = 100.0 × 1.083 = 125.97, paid pro rata.
3. Tier 2: investor's 12% balance 126.44, tier 1 paid it 113.37, it receives 72% of tier 2, so tier 2 = 13.07 / 72% = 18.15.
4. Tier 3 = 163.60 − 125.97 − 18.15 = 19.48.
5. Promote = 20% × 18.15 + 30% × 19.48 = 3.63 + 5.84 = 9.47.
6. Sponsor's capital share = 10% × 125.97 + 8% × 18.15 + 7% × 19.48 = 15.41; investor 138.71.
Excel: compute the tier widths with =MIN(MAX(Equity-Start,0),Width) and sum each partner's share across them.
| Removal formula | Sponsor receives | Multiple on its 10.0 | Saved by investor vs without cause |
|---|---|---|---|
| 1. Without cause: capital and promote at deemed value | 24.89 | 2.49x | 0.00 |
| 2. For cause: promote forfeited, capital pro rata | 16.36 | 1.64x | 8.53 |
| 3. For cause: promote forfeited, capital at waterfall value | 15.41 | 1.54x | 9.47 |
| 4. As 3, capital discounted 25% | 11.56 | 1.16x | 13.33 |
The promote is the bulk of the penalty: 9.47 of the 13.33 between the softest and the harshest clause. The 25 per cent discount adds 3.85 more. Between variants 2 and 3 sits a detail that is easy to miss: valuing the sponsor's capital pro rata, at 10 per cent of 163.60, quietly hands back 0.95, its pro rata share of the promote it has just forfeited. The venture returns 1.64 times its equity; under variant 2 the sponsor still earns exactly the deal multiple, as if it had been a passive investor all along.
| Deemed value | Net equity | Promote | 1. Without cause | 2. | 3. | 4. | Gap 1 to 4 |
|---|---|---|---|---|---|---|---|
| 280 | 124.40 | 0.00 | 12.44 | 12.44 | 12.44 | 9.33 | 3.11 |
| 300 | 144.00 | 3.61 | 17.65 | 14.40 | 14.04 | 10.53 | 7.12 |
| 320 | 163.60 | 9.47 | 24.89 | 16.36 | 15.41 | 11.56 | 13.33 |
| 340 | 183.20 | 15.35 | 32.14 | 18.32 | 16.78 | 12.59 | 19.55 |
At 280 the venture has not cleared its 8 per cent hurdle, there is no promote to forfeit, and for cause and without cause pay the same unless the capital is discounted. The more successful the venture, the more the removal clause matters: from 280 to 340 the gap between the softest and harshest outcome grows more than sixfold. That is also why the appraisal is where removal disputes are fought. A sponsor removed without cause wants a high value, because its promote is convex in it; an investor removing for cause cares much less.
The five removal variants of the book, with what the sponsor's capital interest becomes if the forfeited promote is shared pro rata, are in the free workbooks for this case; the closely related exit mechanism is worked in how a JV buy-sell price is calculated.
Most agreements forfeit it, in whole or in part, and that is usually the largest part of the penalty. On the illustrative venture the promote at the deemed value is 9.47, so forfeiting it takes the sponsor from 24.89 to 15.41, before any discount on its capital interest.
It depends on the clause. Pro rata to its 10 per cent of capital, the illustrative sponsor's interest is worth 16.36; valued as the share the waterfall would pay its capital without the promote, it is 15.41. The 0.95 difference is the sponsor's pro rata share of the promote it has given up.
More for the sponsor than for anything else, because the promote is convex in value. On the illustrative venture an appraisal of 280 leaves no promote and every removal variant pays about 12.44 before discount, while at 340 removal without cause pays 32.14 and the gap to the harshest variant is 19.55.
This article is one calculation from Real Estate Joint Ventures. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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