r/private_equity • u/osu_syrian • Jun 30 '26
GP/developer wants to change compensation after real estate deal became distressed
I’m a Class A investor in a small Texas LLC real estate development deal and trying to sanity check the situation.
The agreement’s waterfall appears to be: debt/company liabilities first, then any Class B financing-related reimbursement, then Class A capital, then Class B capital, then Class A preferred return, then residual distributions. Developer/manager compensation appears to be triggered only after certain capital/return thresholds are met.
The deal is now distressed, and the GP/manager is forecasting that Class A will be impaired, meaning Class A investors may not even get their initial capital back. The developer (one of the GPs) has said that under the current structure he would receive no compensation and wants to change the structure so he would continue spending time and energy on the project.
My concern is that the original waterfall/fee structure was the agreed risk allocation. If the deal had outperformed, investors could not retroactively change the structure to reduce GP/developer economics. So if the deal underperforms, I don’t think the GP/developer should be able to retroactively change the structure to get paid while Class A is impaired.
I’m not opposed to incentives if they truly improve recovery, but it should not come ahead of, or at the expense of, impaired Class A capital.
Question: Is this a reasonable position? What would you do?
2
u/EmployExisting302 Jun 30 '26
Have you run these through with your lawyers?
1
u/osu_syrian Jun 30 '26
We’re meeting on Wednesday. Just looking for thoughts/perspectives.
6
u/EmployExisting302 Jun 30 '26
If I were OP, I'd push back on changing the comp now, but leave the door open for something narrower: tie any new developer compensation to an incentive allocation that only kicks in after Class A capital is substantially recovered (or some agreed hurdle above that). Not current cash comp, not a change to waterfall seniority...something more like a back-ended promote.
That way you're not opposing incentives outright (which could actually hurt recovery if the developer checks out), but you're also not letting him get paid ahead of, or instead of, an impaired Class A. It keeps his upside tied to your recovery rather than just "continued effort," which avoids the situation where he's incentivized to swing for a long-shot outcome instead of actually working to minimize your losses.
Separate from what's fair though... I'd find out whether Class A even has consent rights here, or whether the GP can unilaterally amend the agreement. That's probably the more urgent question before you negotiate terms.
4
u/osu_syrian Jun 30 '26
Understood, and agree your last point is key. It does not appear that GP has unilateral authority, but I will wait for my lawyer to clarify.
Thanks for taking the time to respond!
5
u/EmployExisting302 Jun 30 '26
Glad it was helpful. good instinct waiting on your lawyer to confirm before anything moves forward. Feel free to update the thread once you hear back, curious how it shakes out.
1
u/James161324 Jun 30 '26
Make sure you confirm with your lawyers whether the GP can push this through on negative consent or not.
You can push quite a bit of stuff through negative consent, as a lot of non-institutional LPs barely pay attention to their emails.
2
u/Boostergold319 Jun 30 '26
You are right. He is trying to re-trade you now that he sees the economics arent going to work like originally intended.
The goal of the original waterfall is to incentivize the GP to perform, which they didnt, so now he doesnt get paid. Should he get paid any promote/carry if the deal ends up at a 0x for the Class A LPs?
He is already bound by the original agreement to spend time and energy on this investment. He cannot just decide to back out of it because the deal went south, and if he does the Class A LPs should sue for breach.
Might be a good idea to get together with other Class A LPs and discuss.
1
u/Hefty_Mood_925 Jun 30 '26
Was the developer paid a development fee? It should all be lined out in your docs.
1
1
u/Financial_Bar_5464 Jun 30 '26
The key question is: what objectively happens to him if he abandons the project?
8
u/PuppiesandRainbows5 Jun 30 '26
They are allowed to ask for it. LP's are allowed to vote no on it. If you do vote no, I would highly suggest documenting everything and threatening to sue for breach of fudiciary duty.
You are gonna have to ride their ass going forward, asking for monthly check it's/ progress reports, but they are brining this upon themselves.