Advice--development executive structure
All--would appreciate some advice here. I'm negotiating a comp structure as a senior development executive for an institutional shop. The firm is willing to pay a decent base salary plus 20% of fees and promote. The 20% of fees is based on controlling a P&L, where I would participate in bottom line net income after paying overhead (salaries, including my own/rent/etc) and dead deal costs. I would be sourcing and quarterbacking 90% of development execution, with the CEO helping capitalize some deals and signing guarantees/providing balance sheet support.
The ceo is not requiring me to fund my share of the GP costs--if we have a $1M co-invest, my $200K share is floated by him (ie, he contributes 100% of the GP co invest) and vests into the deal over time at various development milestones. At project sale, I would get my GP amount back (+pref) and 20% of the promote.
The catch is the NOI/fee waterfall. He is proposing that my 20% participation in net fees is after not only regular overhead, but also the GP co-invest amount itself, cost overruns, and pre-development capital. The reality is that it would take 5+ years to see a dime from fee participation, since predev costs and typical GP coinvest eats most of the fee income.
I feel like the co-invest and cost overruns are deal level expenses that should be part of his capital account balance, not the overall fee share bucket. It seems reasonable that he would get priority on return of this capital +_pref at a capital event, but I'm struggling with lumping them into the fee cash flow. If a deal fails, he gets all of his money back from fees and I am left holding the bag on the back end with a GP investment that could be worthless or severely undervalued.
What have others seen in the Executive structure where a partner is sharing in the P&L? Do you agree with my analysis? Thank you for your thoughts!!
Based on the most helpful WSO content, your concerns about the proposed compensation structure are valid, and it's clear you're thinking critically about the long-term implications of the deal. Here are some key points to consider and compare with typical structures:
Fee Participation and Overhead Allocation:
GP Co-Investment Structure:
Promote Participation:
Market Comparisons:
Recommendations:
Your instincts about the structure are well-founded, and these adjustments could help create a more balanced and equitable arrangement.
Sources: Unique LP/GP Setup - Governance Mechanics, Economics, Other Fun Considerations, Equity comp at PE portfolio companies, Compensation Structure at the mid-management level in Corporate Development / Strategy / Finance, https://www.wallstreetoasis.com/forum/real-estate/gplp-structure-friends-and-family-capital-jv-structure?customgpt=1, PE Investment Activity Amidst Spiraling Markets
anyone have any thoughts? thank you!
A lot to unpack here but I’ll weigh in. Admittedly I’ve never negotiated this type of structure as part of my comp but I’ve got deep experience on both the LP and GP side of the ledger.
You’ve got valid points and are sizing up the risks correctly. The intermingling between OpCo and PropCo costs are creating a bit more confusion than needed but I’ll go through issue by issue to simplify.
As far as the return of each partner’s capital plus a preferred return, that is relatively common and not an unreasonable ask, especially given the owner is funding all capital. This will vary a bit product by product type and market by market.
For the sequencing or removal of the pre-development costs, this usually is a PropCo cost when a deal is capitalized or OpCo if a deal fails. In a roundabout way, this again might be a win for you as GP because this is usually your money at risk to get a deal to the point you can raise LP equity. This would come off of your GP OpCo P&L if the deal doesn’t work out anyways in a typical GP-LP scenario.
The cost overruns are also a reasonable and normal request. As LP, we would have options if our GPs couldn’t (or wouldn’t) fund cost overruns within our Operating Agreements including a Priority Capital Contribution (we put in the cash needed but receive 3X credit in equity, paid out first) or a dilution of GP capital (we cram down their equity interest by a multiple), usually at our discretion. I don’t know if you’ve discussed a structure on this issue together yet but if you don’t have any of those mechanisms in your agreement then that’s already a win for you as GP.
The fee split can go either way - overall I’d say that you’re correct in that development fees (I’m assuming that’s the only type of fee you are discussing here, it gets more complicated from a timing perspective if you are including acquisition, asset management and other fees) are typically paid out earlier than what is being proposed.
However, those development fees are typically for paying overhead and expenses to keep the GP/operator going (mainly payroll) and most LPs are going to limit these to covering your costs and not being a profit center. My understanding based on your description is you’ll basically be a one man show in this scenario (as all the overhead costs will be paid and funded via the LP as part of the OpCo P&L).
For most traditional set ups, you’d use that to immediately pay for those costs and you’d take the future risk that you wouldn’t have enough capital and/or deals to potentially to pay your team, etc. As such, the proposed structure is actually reducing risk to you vs a traditional GP-LP structure.
Overall, it sounds simplistic but this will come down to each of your leverage and alternate opportunities. Essentially how valuable are you to the company vs. what options do you have if you don’t take this deal. I’d argue that for most it’d be incredibly difficult, particularly in this environment, to get this type of deal starting off as an Operator/GP. You essentially are putting in no money of your own or guarantees to get a platform off the ground.
One other big consideration for you - how deep is this founder’s ability to fund your deals and will you need to raise LP equity to complete these deals outside of this structure we are talking about?
Hopefully that helps, please clarify if I’m missing anything and happy to discuss more.
This is helpful, thanks. To clarify, this is not a startup venture--we started this company about ten years ago and it has grown to $3B in developed assets since that time. We raise LP capital on a deal-by-deal basis, but at this point we have built balance sheet strength and liquidity to satisfy most lenders net worth tests and self fund the entire GP position on our deals. We are pretty lean so there are substantial profits historically from our fee income. I am tasked with continuing to run the operating business (overseeing our asset managers who run our 15-20 deals) and quarterbacking all execution on our development deals (four under construction, two in active development, and finding future pipeline stuff). Since inception, I have been a cash comp + promote employee only--no participation in the operating business P&L.
It sounds like you think paying back co-GP contribution money from fees before bottom line fee sharing is market. How do you think that would change if I was contributing the co-GP $$ myself and not having it "floated" by the owner?
The biggest gap is trying to establish what is "market" for cash pay during this period between now and the next wave of deals when there is very little net fee income to share. As it stands today, the founder is expecting me to take what feels like a way below market cash comp for the upside of sharing in the P&L and promotes on the next wave of deals which are 4-5 years away.
Thanks very much for your help.
Okay that is very helpful context and changes my original take a bit.
Knowing that your responsibilities also include running the existing portfolio (and that a substantial one exists) is a new element and changes the dynamic in the size of the fees available, the nature of them and how much leverage you have if you were to leave given all you do operationally.
In a typical GP-LP structure, an asset management fee like you’re proposing wouldn’t be available until stabilization of a project so it would be paid out at the end of the project for new deals but any recurring fees from that point forward are yours (dependent on your Operating Agreement). This would also be approved by an LP to fund recurring back office overhead (mainly payroll) to keep the asset operating at a high level but again, this would be covered under the OpCo’s expenses.
So is your current proposal typical? Yes and no - timing on repayment of the co-GP and pref usually are handled at deal exit (sale, recap or refinance) ahead of any of asset mgmt fees.
Most structures I’ve seen for senior hires account for this by giving you a smaller slice of the pie out of the OpCo and the OpCo contributes equity for the GP portion of PropCo with you receiving a similar sized ownership stake vs. adding this element of paying back a co-GP for partners.
This leads me to the topic of you contributing your co-GP portion. There are a bunch of “ifs” to consider here - mainly your personal financial situation and view of your long term future with the firm. Funding your share would definitely change the negotiation and should allow you to unlock flexibility, especially around the timing issues related to the asset management/recurring fee payment issue and even potentially a bigger slice of the promote. It also provides the right type of long term alignment so this should be seen as a big win by your owner should you offer it.
As far as if that’s worth it to you, numbers wise I would run a simple cash flow with an IRR and NPV calculation to see how the returns of the asset management fee income compare vs. the initial co-GP contribution. Once you’ve gotten comfortable with the sensitivities, like any other investment you’d want to consider if those returns are adequate and where else you could place that money (accepting the current structure or proposing to invest your co-GP contribution). You’ll also want a strong understanding of your documents here, particularly cost overruns, managing member/control functions and how and when you get paid out should you choose to leave the partnership.
I left most difficult for last - cash compensation today and if this is a good deal. Others can assist with this but traditional structuring for an executive is usually around 33% base, 33% bonus and 33% long term carry. Truthfully though I think it’s hard to answer what cash comp should be for a senior leader today. Most long term carry is blown out given a majority of deals from 2021-2023 had limited to no profitability. Bonus pool has also been muddled for similar reasons. So either way, you taking this deal or a new position sets your long term carry to essentially zero for the next 3-5 years either way. Not super helpful admittedly but maybe that will help frame your thinking. The last bit I’ll leave you with is to run all this by your CPA and try to figure out how to get these scenarios structured. Equity vs income will make a big difference tax wise for this type of arrangement.
Overall, it sounds like a great opportunity and you should be proud to get this type of offer. Based on what you shared you sound close with enough flexibility that you should be able to get this deal done where all parties are happy.
thank you for using "--" instead of "-". Just so good and relevant. Gold sticker for sure -- get back to work!
bump
The problem I see here is that he can control compensation and hiring, which directly affects you. So if he gets pissed or plays not fair from the start; he could increase firm costs which you can’t do anything about. The costs either need to have a cap or it’s only compensation netted against your deal. You don’t have the same upside he does so why should you take the total downside.
Perhaps I need to reread that post, but he doesn't take the downside. He funds no capital and puts up no guarantees.
that's correct
Make sure he doesn’t do any “Hollywood” accounting on the net profit. Get actual calculations on how this is going to be sliced.
Your risk on the fees frankly is that he takes a giant salary/bonus or you get the profits after he distributes cash back to himself.
Promote - you should make sure you’re written directly into the docs. That should take care of any funny business there.
It makes sense that co-invest and cost overruns fall under the CEO’s capital account, not your fee participation. You’re bringing the development execution, so your fee should come from the clean profit, not from absorbing additional expenses.
Update here for folks looking for comparable data points. Founder's final offer is $300K salary and operating company participation as follows: 15% of GP promote/fees only after his recapture of: i) the deal GP contributions; ii) cost overruns/dead deal costs; iii) annual operating costs of the business, which include his salary which is a match of mine. This is a regional model, so my participation above is only related to the deals I generate...if we hire another MD to work deals in another region, I would not participate in those. I'm in the process of evaluating other options/next steps as I feel this is a weak offer...negotiation did not yield any material changes from this baseline.
I’m sorry to hear that it’s going this direction but appreciate you following up with the final data.
These conversations and negotiations are always tough. That combined with the down market makes it even more challenging.
Fortunately you’ve got a good gig for the time being and can recruit and analyze options from a position of power.
Wishing you the best of luck!
Thank for sharing.
What do you think a market offer would look like?
it's kind of hard to define a "market" offer at this level since every firm's structure is so different. For a structure where I am running multiple deals solo (no in house support), I feel it should be around $450 in cash and 20-25% of the GP with a responsibility to fund GP capital on a 1 to 2 ratio (10% if 20%). There should be an opportunity to take home $1-2M/yr if decent promotes (ie, doubles, not home runs) are being realized. Doesn't feel market to me for the founder to take 85% of the business just for providing the GP capital and guaranty risk, especially since we don't have a programmatic revolver for LP capital.
And for guaranteeing your half a million dollar salary! And fronting all the associated back office costs of running the business.
Generally you can have upside and take risk, or the reverse. The salary you mention is pretty substantial, so the flipside to that is foregoing upside.
To be clear, my cash comp today offered by the owner is not a half million dollars, it is substantially less. Regardless, quality leaders running regional offices for major players command that kind of salary plus a higher participation percentage in the individual deals. My personal opinion is that the balance sheet/liquidity/track record backing is worth 50%, with the remaining 50% usually split up between executives. An offer for 15% (subject to a very punitive waterfall) and $300K is a good offer for a senior development manager, but IMO not an executive running a business.
Right, but you've got a lot of caveats here. Without commenting on your quality or lack thereof, you're talking about highly experienced people running an office for well-capitalized, well-staffed national developers. Maybe that describes both you and the situation into which you're looking to enter. Or maybe your understanding of what regional office leaders are getting paid is off base. But if there is that large of a spread on the bid/ask, then some part of the story isn't apples to apples, ya know?
Personally I think that split is insanely generous to you or someone in your position. You take no risk! All you're doing is going out and spending other people's money. I don't mean that pejoratively, but rather as a commentary on where the actual risk lies, which is the entire basis of compensation in this business.
I guess the interesting thought experiment is to flip this around. Lets say you go out on your own tomorrow. You spend the next ten years grinding out deals, begging, borrowing, and stealing to find LP capital, scrimping and saving your way into being able to meet liquidity and net worth guarantees. Now you want to move into another market.
Are you honestly going to guarantee this new person 25% of the upside on everything you do, plus guaranteeing them a $450,000 salary? Mind you, not on deals this person brings in, but on everything? After all, it's your reputation which allows them the legitimacy to go chase sellers. It's your money guaranteeing everything, your capital funding deposits. It is probably your bookkeepers and your accountants and your asset managers which allow this person to expand. At the end of the day, what exactly are they bringing to the table that dozens of other people don't? Real estate pays well when you take risk. All the risk would be on your side of the table, in this example, from soup to nuts.
I mean, I thought this sentence from a previous post was telling. You are hoping that in a base case, someone is going to hand you a couple million dollars a year. That's insanely generous for someone who isn't in a loss position.
I don't mean to say you are incompetent or unreasonable or anything negative like that. Perhaps I'm the one way off base. I just fail to see why someone who is so manifestly not taking a single iota of risk expects to get that much upside. Maybe take a draw against your promotes, and then you can ask for a lot of upside. Maybe you fund your pro rata share of the pursuit costs and the deposits. Maybe you reimburse the parent office for some share of their overhead.
However, when you say that that it "Doesn't feel market to me for the founder to take 85% of the business just for providing the GP capital and guaranty risk," you're describing pretty much the only valuable things a person provides in this industry!
Put differently, if you think that's not a fair split, go do this on your own! After all, you'd be in the same boat in terms of LP capital. If you think guarantee risk and predev costs should be discounted to that extent, then what separates you from this founder?
Want to add in my 2c. My firm offers 15% of dev fee and 15% of promote to the development partner. They also get a negotiated draw which is accrued and paid back first from any fees / promote.
Founders sign the guarantees and carry all risk. Dev partners have no minimum gp check size but can invest as much as they want and receive LP returns. Some of the dev partners have development support which I believe gets their base compensation from the company and any bonuses / promote share is negotiated and shared between them and the partner.
Thanks for posting and also coming back to update us on how it played out. Interesting conversation and useful data points. I am in a similar career position and know this conversation is coming. I read the thread and understand why you want more money given all that you do (AM/execution/sourcing). You're dead on about benchmarking your long term comp in a down market. It's hard to get aggressive right now as everyone said and it sounds like the CEO stuck to his guns.
Few thoughts:
If you can handle this much active development personally meanwhile also source deals, do you really need this regional office? Capital and reputation/balance sheet sure but given your resume, time to go for it? Maybe buy something if you can't raise the dev capital? As everyone here agrees, nobody is seeing promote for the next 3-5 years so even if your first deal on your own isn't as juicy as you'd like (assuming your capital contribution would be minimal) it's less opportunity cost given where the market is today for even the biggest players.
To the previous point, as someone that wishes they didn't have as much back office overhead and required company-level slog, being nimble and lean and outsourcing what you need to might be worth it as the guy who can make everything else happen.
If you are not participating in any fee revenue from the assets you oversee, that just sounds like a drag and time waste personally from your bread and butter more lucrative development activities. Sounds like you know what you're doing, so why get caught in all the bureaucratic managerial opco stuff if you feel comp isn't compelling enough to keep you from revenue producing work.
If you are eventually successful in someone comping you on a hypothetical future better market or agree to future guaranteed percentage raises, that's impressive. Understood you are the engine driving the machine, but they still sign the guarantees and idk if I would agree to that for anyone as an owner unless they had no kids or family and they lived and breathed this stuff 24/7
This is 100% the crux of the issue. Obviously every employee thinks their contribution is worth more than they get paid, that's life, but this is the question OP has to answer, especially to himself.
He thinks guarantees and predev dollars and back office aren't worth much compared to someone who executes on projects. Well, in that case he should be out on his own. Actions speak a lot louder than words, and at the end of the day for all that most people tend to overvalue themselves, their actions betray that, because they refuse to take the very same risks that they claim others are overcompensating themselves for.
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