He offered me a piece of the project instead of the fee. My judgment is moving.

Question

Scope is a repositioning study on a 60,000 square foot older office building in a secondary downtown, owner wants to know whether to convert, sell, or sit for three years. Six to eight weeks of work. I priced it at $24,000 flat.

He came back and offered $8,000 now plus 0.4% of the project cost if it goes forward, which on his own pro forma would be somewhere around $70k. He wasn't being cute about it either. He said he'd rather have advisers whose money moves with his.

The part that bothers me is that I noticed myself getting warmer on the conversion the second I read the offer. The conversion is the branch that pays me. Sitting for three years pays me $8,000 and nothing else. I don't think I'd falsify anything, and I also don't think I'd chase down the fourth reason the conversion fails as hard as I would on a flat fee. That's the whole product I'm selling, so it's a real problem.

The case for the contingent structure is that it's how he wants to buy, my downside is covered, and clients who feel you're beside them tell you more. Some of the best work I've done came from being trusted with the ugly numbers.

The case for flat is that independence is the thing being purchased, and once my fee depends on the answer I'm a promoter with a spreadsheet.

There's also a version where the contingent piece is tied to him closing financing rather than to the project going forward, and I've been told that's where this can start looking like transaction-based compensation, which is a licensed-professional question, not a forum one.

How do people here handle it?

tylerbrooks9 · Accepted Answer

Separate the two things he's buying. He's buying a recommendation and he's buying execution help. Contingent pay poisons the first and is completely normal on the second.

So split the engagement. Phase one is the study, flat, at your full number or close to it, and you deliver the go/no-go with nothing riding on which way it goes. Phase two is a defined role if he proceeds, and that one can carry the 0.4% or whatever you negotiate, because by then the decision has already been made by him on the record.

You'll take less total money in the case where the project dies, which is exactly the case where you're supposed to be free to say it should die. That's the price of the independence and it's the whole reason anyone pays for outside advice instead of asking their own development manager.

The thing I'd hold firm on is the phase one number. If you cut $24k to $14k because phase two is coming, you've reintroduced the incentive through the back door. You'd be underwater on phase one and made whole only if he builds.

Also write down who else is going to read the study. If a lender or an equity partner sees it, your compensation structure should be on the cover page, and anything contingent on him raising capital needs a securities attorney's eyes before you sign, since how that's treated varies by state and by what you're actually doing.

laurenkim53 · Answer

Small rural markets, different scale, same offer shows up constantly. Nine times out of ten "take a piece instead" means the owner doesn't have $24,000. The offer is a cash flow statement about him, not a philosophy about aligned incentives. Worth finding out which one you're looking at before you design anything clever.

nicole_adeyemi · Answer

@hollow that's the first question, yes. On the substance, the branch nobody defends in these engagements is sit for three years, and the fee structure @compass was offered makes it the one nobody gets paid to defend either. I've watched an owner get talked into an entitlement push on a parcel that just needed four more years of population growth. Every adviser in the room was on some flavor of success fee and the hold recommendation had no sponsor.

@verity's phase split is the version I'd sign. I'd add that phase two should be priced now, in the same document, or you'll spend the last week of phase one negotiating your own upside while writing the recommendation that creates it.

Rena Guide · Answer

For anyone reading who hasn't seen these terms, a few plain definitions.

A flat fee means you're paid an agreed amount for the work no matter what the client decides afterward. A contingent or success fee means part of your pay only arrives if something happens, here the project going forward. The concern in the thread is that a contingent fee gives the adviser a financial interest in one answer, which is a problem when the client hired the adviser to say which answer is right.

Two mechanisms worth understanding. First, disclosure. If people other than your client will rely on your work, a lender, an equity investor, a board, they generally need to know how you're paid, because that changes how they should read your conclusions. Put it in the report, not in a side conversation.

Second, compensation tied to a transaction closing or to capital being raised can move you into activity that requires a license, and both real estate brokerage licensing and securities rules differ by state and depend on what you're actually doing in the deal. That question belongs with an attorney who has read your engagement letter before you sign it, not with a forum.

The phase split @verity described is a common way practitioners handle this. Advice first, priced on its own. Any participation in the outcome comes after the decision has been made and documented by the client.

brandonlee36 · Answer

The tell is already in your post. You noticed yourself getting warmer before you'd signed anything. That's the cheapest data you'll get all year and it cost you nothing.

He offered me a piece of the project instead of the fee. My judgment is moving.

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