Bard Consulting - Real Estate Compensation and Incentives

REAL ESTATE COMPENSATION AND INCENTIVES

How executives, investors and investment managers negotiate and secure the best terms

Edited by

Bard Consulting

Published in December 2012 by PEI Second Floor Sycamore House Sycamore Street London EC1Y 0SG United Kingdom Telephone: +44 (0)20 7566 5444 www.peimedia.com 2012 PEI ISBN 978-1-908783-15-8 eISBN 978-1-908783-49-3

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PEI editors: Anthony OConnor and Wanching Leong

Production editor: Julie Foster

Printed in the UK by: Hobbs the Printers (www.hobbs.uk.com)

Contents

Figures and tables

Figures

Survey figures

Tables

Rolling realised portfolio illustration (all $ values in millions)

Example of first approach (all $ values in millions)

Example of third approach (all $ values in millions)

First-asset sale computations (all $ values in millions)

Second-asset cash flows (all $ values in millions)

Second-asset sale analysis (all $ values in millions)

Third-asset cash flows (all $ values in millions)

Third-asset sale analysis (all $ values in millions)

Summary of result in Tables 5.4 to 5.8 (all $ values in millions)

About the editors

Roy Schneiderman, CRE, FRICS is a principal with Bard Consulting LLC. Bard Consulting is a boutique consulting firm based in San Francisco, California that provides strategic real estate consulting services to institutional investors including the California State Teachers Retirement System, the York State Common Retirement Fund, the California Public Employees Retirement System and a major Middle Eastern sovereign wealth fund. Prior to founding Bard Consulting in 2001, Roys career included stops at Deloitte & Touche and Sedway Group/CBRE Consulting. Roy has a BA in Philosophy from Beloit College, an MA in Philosophy from Yale University and an MBA from the University of California at Berkeley. He is a member of both the National Council of Real Estate Investment Fiduciaries and the Pension Real Estate Association.

Dean Altshuler, PhD, CFA, has provided real estate consulting services as an independent consultant since 1994. Clients have included investment managers, REIT analysis firms, investment bankers, pension funds, developers and universities. Prior to starting his own practice, Dean was the director of real estate research with TCW Realty Advisors. Dean has been affiliated with Bard Consulting LLC since 2006, and leads Bard Consultings quantitative analysis practice.

Dean has developed a niche area of specialisation in performance measurement and reporting, including the development of sophisticated financial models for both asset-level due diligence and optimising portfolios. He has served as a member of the faculty of the NCREIF Academy as an instructor for the Performance Measurement and Client Reporting module.

Dean has published in several Institutional Real Estate Inc publications, where he was formerly a technical adviser, as well as in the Journal of Real Estate Portfolio Management, and has guest lectured at the MIT Center for Real Estate.

Editors introduction

It used to be so easy. Investment managers were rewarded through promoted interests in their investments. People working for investment managers were compensated through salary, bonus, and, at the highest levels, points in the promoted interest. But as real estate private equity transactions have become larger and more complex over the last several decades, compensation of both managers and individuals followed suit. And since the tide was rising, it appeared that the increased complexity in compensation and incentives looked as brilliant as the investments.

The financial crisis that began about six years ago in 2006 has caused a dramatic rethinking of investing and a restructuring of the real estate private equity industry. Questions have been asked, fingers have been pointed, lessons have been learned (and perhaps forgotten!), and pendulums have swung to and fro. In a variety of contexts, the people that have survived the last six or so years and the vast majority of the industry has survived, even if the logos on the business cards have changed have wondered: where do we go from here? What has been a structural change? What has been a cyclical change? And how long will it be before we can all make the same mistakes all over again?

Real Estate Compensation and Incentives provides a framework for thinking about this aspect of our industry as we continue to pick up the pieces after the financial crisis.

Thinking has evolved considerably on this topic since the days in which alignment of interests simply meant the manager earned a 20 percent promote over some hurdle and thus the manager made money when the investors made money and everyone was happy. It is likely that such a simple approach was never really adequate, even when it was apparently working. But the chaotic and fragmented fact patterns that emerged since the financial crisis began have driven home the point that there are no easy answers to the alignment-of-interests issue leading me and many others to conclude that there is no single structure that fundamentally aligns the interests of investment managers and investors under all possible circumstances. The key is to understand under what circumstances a certain set of incentives does indeed align the manager and the investor, and under what circumstances there is misalignment, because one can be certain that there will be some of both circumstances.