Negotiating Participation in Real Estate Deals

I currently work at a boutique RE investment/development firm. When I say boutique I mean very boutique. Besides our back of the house operations (accountants, property managers, etc.) it is the principal of the company and myself doing the deals. We use his capital and platform and leverage his capital with friends and family investors, mostly high-net worth people. We typically do deals in the $10-$50mm range. My role is to help source deals, raise capital, secure debt, and pretty much lead the acquisitions. I stay involved afterward to asset manage and execute our strategies as well. I generally bring in a portion of the LP equity and in some cases, I source the deals. We typically have acquisition fees, which I get a piece of, and I am on a base salary. We are in a smaller market and do not play in the big markets such as SF, NYC, LA, etc.

My question is regarding participation and how much of the promote I should get. We are negotiating this currently. I am not sure if it is 5% or 25% or something in between? Or more maybe? What do you guys think would be a fair compensation for these deals that I am pretty involved in. I am almost like a junior partner in the way that we function but I am technically not and I am a salaried employee so at the end of the day, I still just work for him.

Some things to keep in mind....To do our deals, we use the principal's balance sheet, his money for pursuit costs, and his reputation and platform. I sometimes source the deals but when I don't, I lead the acquisitions and I raise some of the LP capital. He raises the majority of the LP capital. I get a piece of the acquisition fee and I am on a salary. So what should I go for in terms of promote sharing? Thanks.

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Comments (21)

Apr 22, 2016 - 4:57pm

Correct. I am referring to my personal participation in deals. So we have our splits with our LPS and we get a promote. So let's say on a deal, after all the promotes, the waterfall gives us a total promote or $1mm. I am trying to negotiate what % of the $1mm I should get. Thanks.

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Apr 22, 2016 - 5:21pm

This is a tough one. It depends on how "valuable" you are. If you were to "disappear" tomorrow, how difficult would it be to replace you? If his capital and his contacts and his reputation are making the deals work, then one might think that he could always hire an analyst to do the numbers crunching.

So, how valuable are you?

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Apr 22, 2016 - 10:47pm

I work for a larger boutique firm in nyc. I pull most of the heavy lifting. sourcing, screening, underwriting, pitching to partners, executing, project management on repositioning and development, etc.

I typically get 5% of carry. if I invest in the deal I get additional proportionate carry.

Hope this helps.

Apr 23, 2016 - 1:33pm

3 year vest (1/3 per year). If I stayed where I am long term, that would certainly be the case. The plan is to start a shop once an aggressive buying opportunity presents itself in the market. 50% carry (I have a partner) > 5% carry.

Based on your 'Principal' title, seems as if you started your own shop as well. What market are you in?

Apr 24, 2016 - 11:44pm

Thanks for the insight. In your situation, where is the LP money coming from? I am probably raising anywhere from 15-30% of the total LP equity from my personal capital sources so I am putting real dollars on the table. I do not however, put up any of my personal money for due-diligence. So I have no money at risk really. If I left, obviously the show would go on otherwise I would be a partner at this point. I am the only one doing deals besides the owner of the company though. He can't just go hire somebody to do what I do unless he makes them a partner likely. I think I am doing things that people don't typically do at my age. Some definitely do but it is hard to find and I think he has a lot of trust in me. I am thinking maybe 10-15% of the promote is what I would go for.

Apr 25, 2016 - 1:05pm

Majority of LP comes from HNW and institutional. In addition to partner relationships, I bring in new money by putting together meetings for us by cold calling (reaching out to LP shops that would align with our strategies) and networking. I wouldn't say these are my 'personal capital sources' because I'm marketing my firm's brand.

I'm 25 and run with full autonomy with the exception of getting deal approval. I have friends in the same bracket (under 30) in similar positions and some are doing their own things. I would leave age out of it.

Overall, I think negotiating carry is reasonable for your situation. Here are few things to consider:

1) Are your 'personal capital sources' essential to getting the deals done or can your principal replace that money easily? Is he doing you a favor by letting them in? If they are essential I would 100% figure out a way to get compensated for them. Placement fees, or promote on the money you bring in.

2) I think he can hire plenty of people to replace you (sorry, I'm sure you're the real deal but this is the truth). Unless your proprietary deal sourcing and capital raising is paramount to his firm's performance.

3) I think trying to negotiate 10-15% will come down to rationalizing in dollar figures. I don't necessarily think its too high, considering the description of your situation. However, if 10-15% of the promote will be a $2 million nut, I doubt he will agree. Take a look at deal history and try to figure out something that makes sense for both you - if he sees you've thought this through you will get better results than asking for an arbitrary % (not implying that you haven't thought it through).

Good luck! Certainly an exciting negotiation.

Apr 24, 2016 - 7:42pm

CA RE guy -- I don't think a certain % of the promote has a "market" level, I think it's totally dependent on how valuable you are to the guy. Maybe say you get a pro Tara share of whatever you invest in the GP (so if you throw in $20k on a $100k GP, you get 20% of the promote) + 10%. The most valuable thing you provide for this guy is time -- by doing all the heavy lifting and asset managing, the head guy can truly be passive and work less than 40 hrs a week. That's huge. He doesn't want to have you jump ship or start your own thing -- that means he's got to find a new guy, train him, and let him close a few deals before he earns the dude's trust to run deals. Hard to find good people in big markets, even harder in small markets.

May 7, 2016 - 8:39pm

I would assume you should be making all the carry out of the LP investments you are bringing in. If you are bringing in $30MM and you get total fee and commission of $1MM, that should be yours but again like some of the people here mentioned your value to your principal. If you can be easily replaced, then you should be negotiating less but shoot for as high as possible.

Nov 28, 2017 - 5:46pm

I'm kind of right at the same stage as you, probably a little bit behind, so not sure how valuable this will be, but from observation I would say it might be more reasonable to start with a % of the fees then go for carry/participation later on. I think it would come off as a little bit 'upstart-ish' if you ask for everything out of the gate when you've never sourced a deal on your own. Then maybe when you source a couple of things you can ask for the rest the next year. My thought process on this is that it's a win-win for you and the firm as you get a piece of the deals off the bat (thereby probably increasing your total $ comp) and they don't have to pay you until a deal closes. This also takes the pressure off of you to close a deal right out of the gate since if you have carry/participation you're basically under the gun to perform since you're on the fund distribution.

I'm privy to a few of the seniors' comp structure, and one thing I would say is to keep the total $ in mind when requesting fee splits. For example, let's say you source $75 M worth of transactions in your first year. If you're a fee manager for a client (not internal money), the fees usually range from 50-100 bps in my experience, depending on a lot of different things. Using the example above, $75 M x 0.75% = $562,500. Half of that is obviously $281,250. This with a base salary of ~100-150K in my mind would be fair; total comp of $400K+. At least in my market, you'd be in the range of peers unless you're working a crazy amount of hours.

EDIT: this is coming from someone who has sourced a couple of smaller deals and has still gotten the 'grumbles' when the subject of outright carry is brought up.

"Who am I? I'm the guy that does his job. You must be the other guy."
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Feb 20, 2020 - 10:34am

I would just like to add an opinion regarding carry to counter a lot of the points I see in this thread and elsewhere in the RE forum. A couple of common talking points are:

1.) "Carry is too expensive, I would never give up a slice of the promote"

2.) "Unless you are sourcing you are totally replaceable"

You know what else is expensive? A salary for that will keep somebody with transactional experience around for more than a couple of years. Carry is a very cut and dry formula driven incentive comp plan. If a firm has a couple of less than stellar deals or their pipeline gets a bit lean for a stretch they don't have to carry such high overhead. Even if lower level employees are miffed when they feel like a down year wasn't their fault, they will still likely stick around because they know they will get a piece of the next deal or they won't want to lose what hasn't vested.

While point number 2 is probably true for most people out there, carry isn't just about locking employees down and managing fixed overhead. It is also about making sure the people you are entrusting to help make investment decisions have interests that are aligned with yours. Having your entire investment team think of their comp tied to deal volume is a recipe for disaster. This does not have to be incredibly expensive, a very small percentage of the promote can be a meaningful amount of comp for a junior employee and really get them figuratively and literally invested in what you are trying to accomplish.

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