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?