What is a Clawback?
Economic development organizations frequently offer incentives to attract companies. In many cases, the company and the EDO enter into a contractual agreement before the project begins. The EDO commits to deliver incentives, and the company commits to create a certain number of jobs, make a given investment, and/or maintain its area operations for a minimum period of time. If the company fails to meet its commitment, the presence of a clawback provision in the agreement could require the company to pay back some or all of the money it received. In a recent survey, Grubb & Ellis Consulting spoke directly with 31 states, 25 of which reported using clawback provisions. Additional research yields at least 12 more. We found the use of clawbacks dating back to the 1980s. Fifteen of the states we interviewed specifically cited the ability to claw back on a pro-rated basis. That is, if a company promised to create 100 jobs and only created 75, it would only be required to repay 25 percent of t
Clawbacks are usually understood to be a financial mechanism that allows for the collection of revenue that was previously issued to investors and other parties, as a means of covering costs associated with the particular business or investment venture. In a sense, this means that the clawback involves the extension of benefits followed by the retrieval of those benefits in order to keep the project moving forward. There are several examples of how a clawback functions. One is known as the dividend clawback. This has to do with the way that the project is structured and what responsibilities both the sponsor and the investors assume with the project. If the sponsors have agreed to return any previously earned benefits to the project in the event that the venture lacks enough cash to cover expenses, a clawback is possible. This would mean that dividends may be issued in one quarter when cash flow is sufficient to cover all obligations, but those same dividends will be recalled during th
A clawback obligation represents the general partner’s promise that, over the life of the fund, the managers will not receive a greater share of the fund’s distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (e.g., 20%) of the fund’s cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund’s limited partners an amount equal to what is determined to be “excess” distributions.
