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!
Comments (26)
"circa"
"obtuse"
OP doesn't even know where to use it but uses it twice in the first two sentences, both times wrong.
interested as well
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.
Thanks,
I had a clear understanding of the risk profile - just trying to make the best of the situation now and draw on the community for how to make decisions about staying / leaving at times like this!
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.
Thanks for responding all!
When you put the renegotiation that way - it does indeed seem like an in appropriate ask.
And yes point taken on the double edged sword, I am trying to work through whether this risk profile is right for me long term so it's great to get input from the community on how they have made decisions to stay / move on / move to an LP in previous downturns in the past.
You're in office and got pumped, what are you gonna do? Promote is never guaranteed, that's life. Why would you walk from a shop where you like the people around you, have good mentors and market pay, and are sharing quite a substantial piece of the promote for a mid-level employee (usually promote is like 1% at your level of experience)?
Unless they are solely focused on suburban office and have no intention to pivot in which case maybe a good time to run lol.
All good points, luckily we are invested in very prime, central offices in our market so the future looks a bit better than suburban office!
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
Maybe but maybe not - assuming they can cover operating costs and debt service they could still be making good money on both development fees and fund management fees.
I've done some business case analysis on dev fees and you actually make significantly better risk adjusted returns and a better IRR on an average promoted deal.
That's just the name of the game my dude
Everything is negotiable, but everyone is in the same boat, probably more impacted if higher leadership's pay is mostly that v. salary.
What are your options? Depends on severity of the downturn and how many more deals you can get done looking forward as prices reset - either at your firm or another.
I saw some smaller bouncebacks is lesser impacted markets in the early 2010s, but would expect the more severely hit markets with big supply may not come back your way. High leverage is risky, but can also help recover a promote if you make it.
The promote is part of your compensation and I assume you knew the risk going into it.
I wouldn't recommend trying to have them pay you something for the lost value of the promote.
If you want to talk to them about being compensated differently going forward that is totally fine but I would make sure there is a good reason to keep you around and get paid more before you have that conversation.
I employ people to make me and my investors more money. I do not employ people for the joy of paying them. I do love paying my employees for doing a good job and if they outperform, I make sure to show my appreciation with more money. If they are not making me money, then they will get fired in the near future.
If you are at a development shop, the owners probably have personal guarantees on deals that are about to start losing money. They will keep paying themselves over keeping you employed. I would keep your options open and maybe start looking for another job. You might consider a one year master degree or a bank debt workout job while developments sit on the sidelines.
Thanks,
Perhaps I should have mentioned in my original post but all our company and our deals are still profitable. The deals are earning a 7 - 10% return rather than a 15%+ return (so not promote). The company is earning about $4m in AM / DM fees per year - I don't now exact details but I can't imagine we spend more than 50% of this on operating costs so it's still quite profitable for the owner.
Without getting too specific about our firm, personal guarantees are not common in our market and we are lucky not to have any in our portfolio.
Also - get out of the high cost city and move somewhere affordable so you can survive the lean times.
Keeping your costs low is essential in cyclical businesses and development is very cyclical.
My uncle lost mid 7 figures from fannie/freddie stock back in the GFC (all from stock based compensation that he didn't sell). Still did ok and retired but that chopped his net worth more than 50% at the time. Still jokes about it but i'm sure it's gotta sting.
People are resilient and move on and keep it going.
A little different because all that was realized. I think the outlook is make the best decision based on the information you have today. If the value of the carry is zero value it as zero in your comp and make future decisions based on that.
Not to pile on too much, but some more food for thought - if it would be unfair for your firm to cut your pay if the promote ended up being much higher than expected, it's unfair for you to ask the same the other way around. There's a reason most people advise that you assign a $0 value in your head to the promote you earn...it can go poof in an instant.
It seems as people have already given you good advice regarding negotiating your economics so I'll touch on something that I haven't seen yet. It seems as if your firm is highly invested in office properties. If you don't believe in the future of office, and you want promote to be part of your compensation, you should look for other employment. Working somewhere that aligns with your investment style (and thesis) should be a priority as you move further along in your career and take more economic risk
Office has been hit so hard that it may just be the one sector with room to run and hit promotes over the next few years. Just playing devil's advocate. Agree it's a tough place to be excited about right now.
True this - Promote becomes worthless, now you can leave without leaving behind unobtainable comp elsewhere.
Live on the base (or less!) and save the bonus and save the promote!
It will come back around again, don't sweat it
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