How Profits Are Split in a Saudi Joint Venture: A Worked Waterfall Example

An illustrative distribution waterfall for a Saudi real estate joint venture, showing return of capital, a preferred return, a promote and why land valuation matters most.

In a joint venture between a foreign investor contributing cash and a Saudi partner contributing land, the order in which proceeds are paid out, the waterfall, decides who gets what, and the valuation of the land often matters more than the headline profit split. The example below uses invented figures to show how return of capital, a preferred return and a promote work in sequence.

The situation

A foreign investor and a Saudi landowner form a joint venture to develop and sell a residential project. The investor contributes cash, and the landowner contributes land at an agreed value. The landowner also manages development and receives a larger share of profits above a preferred return. All figures are illustrative.

Assumptions (illustrative)

• Investor cash contribution: SAR 30,000,000 (illustrative).
• Landowner land contribution valued at SAR 20,000,000.
• Ownership by contribution: investor 60 per cent, landowner 40 per cent.
• Distributable proceeds after all costs at the end of three years: SAR 70,000,000.
• Preferred return: 8 per cent a year, simple, on contributed capital.
• Profit above the preferred return split 50 per cent to each party.

Step 1: Return of capital

Investor receives SAR 30,000,000 and landowner receives SAR 20,000,000, a total of SAR 50,000,000. Remaining: SAR 70,000,000 minus SAR 50,000,000 equals SAR 20,000,000.

Both parties first get back what they put in, at the agreed values.

Step 2: Preferred return

8 per cent times 3 years equals 24 per cent. Investor: SAR 30,000,000 times 24 per cent equals SAR 7,200,000. Landowner: SAR 20,000,000 times 24 per cent equals SAR 4,800,000. Total SAR 12,000,000. Remaining: SAR 8,000,000.

Each party earns a base return on its capital before any promote applies.

Step 3: Split of the remaining profit

SAR 8,000,000 split 50 per cent each: SAR 4,000,000 to the investor and SAR 4,000,000 to the landowner.

The landowner receives more than its 40 per cent share of this layer as a reward for managing development.

Step 4: Total received by each party

Investor: SAR 30,000,000 plus SAR 7,200,000 plus SAR 4,000,000 equals SAR 41,200,000, about 1.37 times its capital. Landowner: SAR 20,000,000 plus SAR 4,800,000 plus SAR 4,000,000 equals SAR 28,800,000, 1.44 times its capital.

Both parties make money, and the landowner earns a slightly higher multiple because of the promote.

Step 5: Compare with a simple pro rata split

Without the waterfall, SAR 70,000,000 split 60 and 40 gives the investor SAR 42,000,000 and the landowner SAR 28,000,000.

The promote moves SAR 800,000 from the investor to the landowner in this case.

Step 6: Effect of a higher land valuation

If the land were valued at SAR 25,000,000 instead, total capital is SAR 55,000,000 and the landowner share is 25 divided by 55, about 45.5 per cent. On a pro rata split of SAR 70,000,000, the landowner receives about SAR 31,818,000 and the investor about SAR 38,182,000.

A SAR 5,000,000 change in land value moves about SAR 3,818,000 to the landowner, far more than the promote does.

What changes the answer

• If proceeds are lower, the preferred return may absorb most of the profit and the promote may not be reached.
• A compounding rather than simple preferred return increases the base return and delays the promote.
• Timing of distributions matters: earlier returns of capital reduce the preferred return owed.
• Tax and Zakat treatment of distributions differs between Saudi, GCC and foreign shareholders, so confirm with an adviser.
• If the land has title or permitting issues, its contributed value may be overstated.

What the numbers tell you

• Negotiate the land valuation as carefully as the profit split.
• Use an independent valuer, such as one accredited by Taqeem, and agree the method jointly.
• Model the waterfall under low, expected and high proceeds before signing.
• Make sure the promote rewards real value added by the managing partner.
• Write the waterfall precisely into the shareholders agreement to avoid disputes.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

If a Vision 2030 programme or market trend is shaping your investment case, Domira can test it against real land, construction costs and local demand in the city you are considering before you commit capital.