Promote from $500k to literally $0 - what do those who have been through a RE downturn recommend?
Background: I work at a small developer in a high cost of life city, I have circa 5 years of experience and am in an investment role. We develop commercial space, traditionally in JV's with PE funds and have roughly 20 deals (circa $2b). We put in 5% - 10% equity and have a different promote structure on each deal. Roughly speaking we get 10% over a 10% and 20% over a 15%. We aren't a brand name yet as we are a relatively new firm but we have managed to get some tier 1 PE capital / high profile deals so there's lots of momentum. I am getting great experience across investment / AM and Dev in my role and the people at the top of the company are excellent.
Our pay structure is market base + 25% bonus + 3-4% of promote in the deals we work on. Up until a year ago, things were looking pretty good - my promote was valued at roughly $500k and looked pretty promising. Now with interest rates, valuations, construction costs and some tax changes in our markets I would value the promote at $0k if being honest. I wouldn't even say that any of our deals are underperforming business plan wise - it's mostly just due to massive shifts in valuation yields (we own a lot of offices) and interest rates (fully unhedged on most deals).
I would love to hear from those who have been through similar downturns in the past:
- How did you make decisions about staying at / leaving your firm in moments when promote / LTIP looked like it was out of the money? Did it pay off?
- Would it be obtuse to try to renegotiate my comp structure given how far out of the money our promote is?
Thanks!
"circa"
A promote is a bonus. You get a bonus for outperforming, it's not a promise of x dollars.
What exactly did you think a promote was?
"Here you go kiddo, I've made no money but have 500k because I'm feeling generous"
I mean, the whole concept of a "bonus" is so far from its original intent that it's kinda hard to blame people for not understanding the concept. Look at any of the comp threads that get posted - lots of talk about "guaranteed" bonuses, which is just another word for salary!
More to the point, very few people, especially juniors, truly understand the concept of risk. I get the feeling people will finally understand what their job really entails when it starts hitting their comp, and not firm-wide returns. Which is good.
OP - if you tried to renegotiate with me because you're promote wasn't in the money, I'd laugh in your face. Next time, take a smaller salary but guaranteed money. Risk vs reward: it's an important lesson to learn.
I will admit the word bonus today is really just a means to communicate deferred compensation at larger firms. I think I've received an actual bonus maybe 25% of the time, i.e. where the boss pulled me aside individually and thanked me for work, highlighted how our team was performing economically, and let me know he was stroking me a cheque.
Setting that aside, welcome to the real estate game! We play for promote cheques to create our wealth. That's a double edged sword and you, and many others, are beginning to realize what the other side of that sword feels like. But it's all in the game.
So either that's a fit for you, you chalk up this round to a missed opportunity, and move on. Or it isn't a fit for you long-term and you seek some more corporate position at a larger firm or leave real estate Sponsorship all together. It's not for everyone, so I get it.
P.S. Yes, would be offensive to try to renegotiate your compensation because your promote didn't hit. You are already being paid a market base salary. This is just the way it goes when you're a Sponsor. Can always go off and join a LP.
Your bosses are Probably underwater by alot more than you so i dont think asking to lower skin in the game is going to go over well, also not a good look optics wise
Development is a dollar cost averaging business. Anyone merchant building that thinks they know what deals are going to hit and which won't are full of shit - it's a long game business and you need to have a lot of resilience to keep pushing forward in head winds, then hope that you have more winners than losers. If your firm has a lot of those deals coming out of the ground the dev fees should feed your salary and bonus until the next cycle starts. Don't forgot that there is real money made by owners here.If you believe in the shop strap in for bumpy ride the next few years. My bet is that the projects that will come out of the ashes of this downturn will be home runs, and if you can stick around until those sell that's when your promote will be worth something.My advice being in a similar situation.