Have Been Offered Partnership in Developer - How is this Normally Structured?
I work at a small but well-known investor / developer - we are a smaller company but work with top tier PE & institutional partners and have been lucky to develop some very high-profile deals over the past few years. I won't give too much detail on geography or sector as I would be easy to identify but I would say we are a leading player in our city (HCOL). We follow an operating partner model – we coinvest in deals with our balance sheet capital and we earn AM and DM fees and promote.
I joined as one of the first employees and we have grown a ton since. However, like many developers right now, our promote has been wiped by the market and we’ve had a few key (C level) team members depart because of this. I am in a lucky position where the CEO really wants (really needs) to retain me and has offered to make me a minor partner in the business. My comp will move away from promote (worth very little right now) and towards general business profitability. We are currently working through how the partnership profit share will be structured and I am hoping to reach out the community to get a sense of what might be “market standard” – fully appreciating that there may be no such thing but any insights would be helpful!
My current comp: $140k base + 20% bonus + 1% promote in all our deals + 5% promote in the deals I’ve run / bought. Promote would be worth 500k – 600k of it were in the money, likely worth nothing right now.
My new comp: $160k base + profit share. High level the profit share will be:
- A fixed percent (say 2%) of after-tax profit
- Minus the same percent of anything we need to Coinvest on deals
- Our coinvest is unlikely to exceed our profit in any year but if it does I’m not liable – so I never need to put my own equity in
- I don't need to buy in to the partnership with my own equity on day 1
- The payoff outcomes are hugely variable based on the number of new deals we do / the promote payouts on our existing deals - could be anywhere from 30% to 150% of base per year
I would hugely appreciate any insights on how partnership works from others who are in a similar / more progressed stage in their careers! Especially examples from the operating partner / developer world would be helpful.
Based on the most helpful WSO content, here are some insights on how partnership structures in the developer world typically work, especially in the context of an operating partner model:
Key Components of Partnership Structures:
Base Salary and Bonus:
Profit Share:
Co-Investment:
Promote Structure:
Considerations and Market Standards:
Equity Buy-In:
Variable Payoff Outcomes:
Retention and Incentives:
Examples from the WSO Community:
Capital Partner and Developer Splits:
Family Office vs. Traditional LP Career Path:
Multifamily Development: Small Firm vs. Large Firm:
Conclusion:
Your new compensation structure seems well-aligned with market standards, especially given the current market conditions and the need to retain key talent. The fixed profit share, lack of initial equity buy-in, and protection against co-investment liabilities are all favorable terms. It’s important to ensure that the profit share percentage and other terms are clearly defined and documented to avoid any future misunderstandings.
If you have any further questions or need more specific examples, feel free to ask!
Sources: Life as a Real Estate Operating Partner - 4 Observations, Capital partner and Developer splits, Multifamily Development: Small Firm vs. Large Firm, How are you structuring equity split on personal deals?, Structure of Mortgages on Joint Venture agreements
What is your role / responsibilities? Need to know more details to better gauge comp.
Also what market (tier 1,2,3) is this? A tier 1 market where things are more expensive like nyc, seems like it's not but jw.
Tier 1 market, my title will be Head of Investment - realistically my time is half focused on new investments (sourcing deals, equity, debt) and half running the financial side of our existing deals. I have two associates and an analyst working under me.
Sounds like a way for them to dangle a carrot that won’t pay out. Have they showed you a model of the business? If they aren’t showing you all expenses including pay roll, it’s likely not going to be a fair shake.
I’ve seen these types of junior partnerships and I don’t think they ever end up being a good deal. I’d just make them commit to paying you cash off the gross revenue. Anytime “profit” comes into the equation it basically becomes discretionary.
Second, it sounds good when the #2 millionaire SVP/MD comes to you with this proposition and everyone thinks this is their way to real money even if they continue to think their salary is lower than market.
Push for more salary, cash today and that's certain is what matters. Ask for that same deal and $180k or $200k base, not the best job market but rates are hopefully heading down at the end of year so why not - $20k increase is nothing.
Look it's better than nothing right? Opportunity to make good money you didn't even have before so take it but secure more base say $180k base and 30% bonus with this - this is supposed to be a big step up and pushing you out there to start bringing in business for the firm, not a little add on like it seems in it's current firm like oh here's a few extra dollars but to keep you around we'll add this profit scenario.
What's base in your market, do you think you're underpaid?
FYI at another firm I was at, family office, the president saw how well past juniors did on deals and closed the path to real wealth cutting down on what they offered Senior Associates+.
Edit: Saw HCOL, I know people now getting $150-$175k base with 20-100% bonus in those markets and that bonus is always paid out full. Ask for more base try jumping to $200k base 30% bonus.
Thanks for your thoughts.
It's a good point on the base, which is definitely low - our company has relatively low salaries across the board with high promotes. I will see if I can work this into the equation as it would be the most certain type of comp by far!
This. If they are giving you a profit-split as part of becoming a partner, they should be giving you a model. If they are not giving you a model to help you understand the economics, that is a red flag.
Now that red flag could mean one of two things. This could mean the business is not a sophisticated one, which can create annoying issues. This doesn't seem to be the case base on your description, but this shouldn't be ignored. The more likely scenario is that they are not providing a model because this isn't a "real" partnership role. If they don't give you a model, which to be clear they have every right not to, then you should ask for a percent of revenue.
For simplicity's sake, let's say they will give you just that fixed 2% of AT profit. Take the "typical" development deal you modeled out. Let's say that model shows 2% of AT profit equals 0.2% of revenue. That 0.2% should be your counter.
This reminds me of my aunt's brother. He is a writer. He has written some of the more classic Simpsons episodes. He also sold the script that ended up becoming the movie Yesterday. He chose to get paid as a percent of profits. The movie netted ~$100 million (based on box office and stated budget). However, he received a relatively nominal amount because of how the accounting was done. There was a real economic profit where he could have received a life-changing amount. But he didn't because he just didn't know up front what those costs could be (granted, as an experienced writer, he probably should have). The point being, if they won't share cost expectations, you are likely to get screwed. And it may not be intentional. Your company many not be trying to screw you. But you can very likely end up there if they don't give you enough information. Which is why if they don't, ask for a percent of a revenue
Hollywood accounting is notorious for being tricky, plus the discretion for distributors have in marketing/promoting the movie can cause "profit" outcomes to vary drastically. I don't know if the same shenanigans happen in real estate, but I think all the comments here have the right idea, push for more clarity on what it means to get 2% profit.
Thanks for taking the time on this.
I do have a model but the cashflow the business generates is hugely dependant on how much we Coinvest each year and whether our promote pays out.
I would say the company is a sophisticated developer at the deal level but we try to keep the company really simple - we have a forward looking fee forecast and cost forecast - we roughly model out the promote we think we will receive but realistically who knows if anything will pay out these days! Coinvest is also super hard to forecast as every LP has a different idea of how much skin in the game we need.
Great idea on countering with a % of revenue - it echo's what a few above have suggested and will be at the top of my list!
Thanks for your comment. That is indeed what I am worried about!
I do have a high level model of the business which is backed up by historic actuals - our revenue (fee income) and costs (salaries, rent, etc.) are very easy to model - what is tough is the coinvest and the promote assumptions. Without going into to much detail, we operating across a few different types of development deals, some require a high coinvest (5 - 10% of total deal equity) and some require almost none (0.3%). The promote and Coinvest can massively sway the cash left to distribute!
A revenue share would definitely be preferable - I will sense out whether that's possible.
As a more general comment: there should be a better way to analyze comp as you take steps up the real estate ladder. There's some general consensus on acceptable comp at the lower rungs, but as you get a little higher you have fewer benchmarks to go on. Who are the best people to provide reality checks on this? Recruiters?
I'd say contacts are best. Recruiters are helpful but keep in mind as much as recruiters work for candidates they also work for firms...
If I was an attorney who was entrepreneurial and had a RE background, I’d create a niche for myself to help negotiate and paper these partnership deals for RE professionals. I’d have a litigation partner to enforce.
I’d provide comps to my clients, much like how a Hollywood or sports agent would. Except we are not making 10% on tens of millions of dollars like they are.
However, usually these closely held company deals are amongst “friends” and the ramifications are only felt later with the passage of time. So, everyone has optimism and don’t play hardball.
Think about a few things:
- when will your liquidity even come on your platform business? Could you foresee someone buying this development company? Or is this a hold forever situation (with maybe the owner’s son/daughter taking over?). If you can’t get out, discount that value greatly in your mind. Could this be a BIMBO (buy in management buyout) where the employees after showing they are executive and partner material retire the founder and pay him/her out over time?
- are you the future “son / daughter”? Is this a foothold into something more? Maybe a path for you to be CEO one day and this is the first step?
- what is the personality and character of the firm ownership and top people? Are there other minority partners like yourself with similar terms? Can you and them act as a future voting (and possible contract enforcing) bloc?
- does your ownership remain if you leave the firm one day? Are there other passive income partners that the firm currently pays out in good faith?
Great comments thank you,
As a bit of context we are a young business - the CEO is 36 and the majority of employees are between the age of 28 and 35. I can't picture him selling any time soon - he's one of those people who are addicted to work. However there are a few examples of operating partners being bought out and merged into a institutional platform.
My immediate role will be head of investment, with a move to a CIO or CFO role in about 2 years. I could potentially be in a CEO position but it would be a few steps away!
There would just be one other partner - I don't think we would be able to force anything on a vote but we are lucky to have an open dialogue about how things are being structured right now with the CEO.
There are no passive income partners and I wouldn't be able to keep the partnership if I left.
At 2%, I would view this as a means to an end, vs the end. If things fall out between you and the company, you’ll end up with way less than you imagined.
That said, it’s a good sign to be offered a piece of the platform. If I were to sneak in a term, I would have it vest within a certain number of years or company revenue milestone. If you are going to swallow their pie in the sky proforma growth story, might as well get vested when cumulative revenue hits 60% of proforma and is on its way higher. Remember you’re swallowing his Hope Certificate, make him committed to fulfill his end of the bargain. There will be good times and bad times, and there should be a time in the future where you actualize at least on paper.
But even vesting at 2% doesn’t mean that much regarding certainty of payout. But at least you’d be more “sticky” when success comes legally and psychologically - at the very least have job security and a seat on the “vehicle.” You become more “long term.” If the CEO refuses, that is a red flag. If and when the company becomes successful where they can hire anybody, the guys from the early days get thinned out. People become replaceable. Memories fade. I’ve seen this happen multiple times.
These are all good conversations to have, and congrats on being seen as partner material.
If you are valuable enough to earn a cut of the operating business, go do your own thing. If I were you I would negotiate as much cash comp as possible, learn as much as you need to (fill some knowledge gaps), then go off on your own. Being a junior partner is just dangling a carrot, the big guy (founder) will always cram you on equity and work 1/2 as hard as you.
I think the better question is does this move get you closer to your ultimate goal? I have no idea what that may be. It sounds like you will be doing similar work. From a high level I actually think your comp could be worse. The vast majority of shops that I know are only slightly profitable on a fee basis, and the real juice is coming from doing successful deals.
You are already being compensated for doing successful deals. This is maybe a slight upgrade (to comp) at best. So again, what are you getting career wise out of this? Are you trying to become the owner of this shop? More mentorship from the owner or someone else you respect? More bandwidth to run your deals?
I would say that it is a good step towards my goals - I am jumping a few rungs of the ladder with this position in terms of title and responsibility, which I think will be helpful if I were ever to want to exit to 1) do my own thing or 2) do something slightly more institutional.
I don't picture being able to own this shop outright.
I do get huge upside in terms of mentorship from the owner - I essentially become his right hand man. I enjoy working with him so this is great for me.
It sounds like you're in an exciting and challenging position! As a Texas mortgage lender, I've seen various partnership structures and compensation models in the real estate and development industry. Your proposed new compensation package with a fixed percent of after-tax profit minus the same percent of co-investment contributions seems fair, especially with the safeguard of not having to put in your own equity initially. This aligns incentives well and provides significant upside potential.
In similar roles, I’ve observed profit shares typically ranging from 1-5%, depending on the size and profitability of the company. Ensuring clarity on how profits are calculated and the timing of distributions is crucial. Additionally, having a transparent understanding of your co-investment responsibilities and the associated risks is key. It might be beneficial to seek advice from a financial advisor or mentor who has experience in the real estate development sector to tailor this structure to best fit your career goals and financial expectations. Good luck!
Ask your CEO why they’re removing your promote in deals and your bonus and only paying you $160k to be a “partner.”
If the motivation for this is to retain you, they certainly don’t seem to be trying that hard.
Maybe I'm missing something since nobody else has touched on it, but as described it really doesn't look like you're joining the partnership and you're just getting a slightly more complicated profit sharing setup.
Yup. This is the old Wood Partners model where your comp is a % of the firm’s dev fund instead of % of deals. (They might still do this idk)
Can you explain further, what was the old Woods Partners model? So instead of sharing a similar piece of the whole pie across all deal types (dev, value add, etc), they only give a small piece of the riskiest deals in the pipeline? Anywhere I can read more about it, will do some googling.
If they are removing your existing promote and retained comp this is 100% a red flag. There is zero reason why they should be doing this. As others have said, 160k is a joke for a "partner" regardless of the tier of the city. There is something that is off here, unless you have expense budget approval or authority I would be very cautious about the promises being made here.
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