Also referred to as a partnership crystallization, a crystallization is a provision in a real estate joint venture agreement where the partners agree to adjust the ownership share in the venture at some pre-defined point in the future. It is most common to value-add and opportunistic investments, where a large increase in value is likely to be realized early in the investment.
At a point in time when the crystallization is to occur, the partners run the proceeds of a hypothetical sale through the equity waterfall to calculate the expected distribution to each partner. Based on that expected distribution, the ownership share is adjusted to reflect the share of the distribution each partner would hypothetically receive.
So for instance, imagine a JV where the GP owns 10% and the LP 90%. At crystallization, the partners assume a $100 million sale and run those proceeds through the waterfall model. The model calculates that, based on the promote structure and terms of the JV agreement, the GP would be distributed $17 million at sale and the LP would be distributed $83 million at sale.
The ownership share (i.e. the percentage distributed to each partner) from that moment forward would be 17% to the GP and 83% to the LP. And no further promote would be paid to the GP (i.e. the promote would be frozen).