Earn-outs In Real Estate: A Tool For Unlocking Value

An earn-out can be a very useful mechanism for adjusting the price of a transaction according to the future performance of real estate assets. It sits alongside other options such as: (i) simple price retention (holdback); (ii) the deposit of conditional amounts in escrow; and (iii) price adjustment clauses. The suitability of an earn-outs or any of these alternative solutions should be carefully assessed in light of the specific features of each transaction.

The pricing challenge

How much is a property worth when it is still being developed or is still going through the licensing process, or when it has potential for renovation or its future occupancy is uncertain? How can you make sure that the purchase price reflects the asset's true potential?