[Profit Sharing] - Taking on distressed real estate project not in my scope or company / what percentage of profit is reasonable?
The principal at my industrial firm has a partner in a different company who owns an underperforming commercial asset. The asset was slated to be converted to industrial as the location was in a relatively dead area for retail traffic.
Upon a serious two-three-year entitlement process, the neighbors finally killed the industrial-warehouse development. The partner tried to legally fight their way through the finish line, which built up a lot of resentment between the City/Neighborhood and the developer.
The partner reached out to the principal of my firm and asked me to see if an industrial condo (smaller industrial warehouses of 5-10ksf) would work. It barely penciled, but the partner was just looking to exit not-at-a-loss.
I spent about 60-100 hours outside work hours working on this to date just to get the pitch in front of the partner and I pitched a residential townhome development which was profitable. No one has any multifamily experience, but I have nearly 10 years prior to my current job working in the sector. Due to the carry costs, I pitched a streamlined entitlement process where I would do all the direct engagement, architectural work, and the partner would just pay for legal counsel, fees, and landscape consultants. Previous work for diligence and environmental clearance was done with the previous project and would only require minor modifications to the studies, so little additional cost there.
Our principal is not taking any financial risk as the partner is fully funding the entitlement costs (and risks), whereas I would be spending my time outside normal firm work to pull this through the finish line. And the project seems to be a go, but I have not discussed profit sharing arrangements.
Question: If our firm is set to reap 15% of final profits (lets say $3.0m) to get this sold as entitlements, what would be an appropriate compensation for me? It's not equity as if it fails I have no residual land value, nor is it a JV where its kind of tax advantaged. It's a fee proposal if the project sells, and $0 if it fails. I feel like I'm taking on the most risk/effort here. I want to say the equivalent cost of hiring an outside developer would be somewhere between 5% of total project value ($2m guaranteed fee) or some sort of 3%+ share of profits.
Would it be uncouth to ask for 80% of our firm profits for this particular deal? Not sure what our principal provides aside from bringing in the connection to the partner.
I would just ask to be paid as a consultant at some hourly rate, and bill hourly. You're kinda stuck for the hours you've put in - I suppose you can ask your boss for a bigger bonus this year, but more likely this is just a life lesson learned.
No one is going to give you 80% of the upside - why the hell would your firm do it in the first place if they're just going to pass all that money on to you? The partner, not your boss, should be paying you a fee and you should ask for a piece of the entire deal and not just the piece your current employer is getting.
At the end of the day, the most important thing to do is have an honest discussion with your principal. He's asking you to do a lot of work to help his friend out, and my guess is he doesn't understand just how much work you've put in and how much that could be costing him.
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