march 2019 ncreif promote and incentive fee slides final ... · microsoft powerpoint - march 2019...
TRANSCRIPT
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Matt GilbertDirector, Performance
nuveen A TIAA Company
Eric Mack, CPADeputy Senior Financial Officer
USAA Real Estate Company
March 20, 2019
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Agenda:
Introduction Structures and Legal Agreements Waterfalls – Building a Model Accounting and Financial Reporting Performance Treatment and Implications Open Discussion
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Introduction
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Promote•Paid to a partner when a project exceeds “target(s)”•AKA – Carried Interest•Typically paid by LPs/Non-Managing Members to GP/Managing Member
•Taxed as a capital gain for individual tax payers
Incentive Fee
•Paid to a partner, affiliate or 3rd Party when a project exceeds “target(s)”
•Typically paid by all partners•Taxed as ordinary income
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In addition to promotes and incentive fees there could be other fees with a similar impact or implications:
◦ Bonus fees (paid to fee developer; a certain % of available funds for distribution after debt, interest and equity is paid)
◦ Tenant/Lender participations◦ Participation to prior owner (typically land seller)
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Structures and Legal Agreements
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GP/Managing Member
LP/ Non-Managing Member
Fund
10% 90%
Promote
JV
90%
Operating GP
10%
Promote
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GP/Managing Member
LP/ Non-Managing Member
Fund
10% 90%
Advisor
0%Incentive fee
Fee Developer
Tenant/Lender
Prior OwnerJV
Operating GP
10%90%Incentive fees
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• Limited Partnership Agreement• LLC Operating Agreement• Management Agreement• Development Management Agreements• Leases• Purchase and Sale Agreement• Side Letter• Other
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Tier 1•Any shortfall contributions and returns •Typically not applicable
Tier 2
•Return of capital with a preferred return (i.e. 9% IRR, Preferred Return, Equity Multiple, 3rd party benchmarks i.e. ODCE, Etc.)
•The preferred return is typically to the LPs and to the extent applicable to the GP/Managing Member
Tier 3•First Promote/Incentive Fee Level (i.e. 20% to GP with remainder prorata to Partners, 30% to
managing member and 70% to other member (when percentage interests were 10%/90%)•The Promote/Incentive Fee is to the GP/Managing Member/Advisor
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The IRR hurdle to meet before a promote or incentive fee is paid may be levered or unlevered
Levered: ACTUAL - Cash flows including debt and interest payments. NAV includes debt obligations, lowers NAV
Unlevered: HYPOTHETICAL - Cash flow before debt and interest payments. NAV add back debt obligations, increases NAV and produces a higher return
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Claw-backs◦ Impact on Revenue Recognition◦ After Tax Distributions◦ Security
Pooled Returns◦ Tranches of investments within a vehicle◦ Separate vehicles (Parallel Vehicles, Programs, Etc.)
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Waterfalls – Building a Model
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What Three Wise Philosophers
Don't go chasing waterfalls Please stick to the rivers and the lakes that
you're used to I know that you're gonna have it your way or
nothing at all But I think you're moving too fast
Do not have it your way… and don’t do these too fast!
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Excel Model
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Accounting and Financial Reporting
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Usually no accrual of a promote or an incentive fee for historical cost due to the following:◦ Not in the money usually – would not exceed the
IRR hurdle etc.◦ NBV continues to decrease due to depreciation
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Fund Level Venture / Investment Level
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A promote is not recorded on the P&L; only an equity swap and is reflected on the fair value statement of equity as a swap between the LP and GP – DOES NOT REDUCE NAV
An incentive fee is accrued on the fair value income statement as an affiliate expense and is an expense of the fund and shared by all partners – REDUCES NAV
An incentive fee that is not an expense of the fund and is “outside of the fund” is not presented in the fair value financials because it is an expense of the individual partners
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Performance Treatment and Implications
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Unleveraged Investment and Fund Level Returns• Promotes are generally paid after the effects of
leverage• Waterfall structures are set up with underwriting that
reflects the effects of leverage
• Unleveraged is a “what if” scenario so why not adjust the associated hurdle?
Its more complicated than that…
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Denominator Effect• Unpaid promotes decrease accounting NAV• Size of assets and related income does not
proportionately decrease
• Gross return is a “what if” scenario so why not adjust the 2 NAVs separately
Its more complicated than that…
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Open Discussion