How to give a percent of your deal to a broker but keep the power consolidated
In the past, I’ve done posts on deal structures for developers.  In my examples, I talk about scenarios where the developer should get 30% of a promote for their sweat equity and from the remaining 70%, they should give away the % of the company that land (or investment) reflects.  That means, if someone is contributing half of the total equity, they should get 50% of the 70% economic component of the company.  If they were to contribute ALL of the equity for the deal, then they would get all of the 70% (with the developer retaining their 30% of the promote).  To learn more about this structure, see my old post: [https://www.reddit.com/r/CommercialRealEstate/comments/ldfp8r/what\_should\_i\_put\_into\_my\_project\_what\_should\_i/?utm\_source=share&amp;utm\_medium=web2x&amp;context=3](https://www.reddit.com/r/CommercialRealEstate/comments/ldfp8r/what_should_i_put_into_my_project_what_should_i/?utm_source=share&amp;utm_medium=web2x&amp;context=3)

This post, however, focuses on how to structure the organization of companies so that you keep maximum control for your land owner.  If you’re going to give anyone (like a broker) even just 5%, you will want to structure that in such as away that it never can we played against you.  Let’s assume you want to give 5% of the deal to a broker that brought you the investor for your deal.  You also have that investor that is giving most of the equity need, and so they want 50% of the deal.  Now, if you give 5% of the deal to the broker, you are going to be giving away your power.  If there should ever be a conflict or a vote (and you’ve given everyone voting rights with respect to their ownership percentage), you’re giving the 5% broker way too much power.  So how can you still give them 5% of the deal without actually giving away your power?

You give them ownership from your company that owns your interest.  You should be creating another company to own your 50% interest at the deal-level anyway, owning the SPV that owns the land and the development.  From there, from your company that owns 50% of the SPV, you now give the broker 10% of that company.  Your 90% in the intermediary will always beat out the 10% minority owner.  Now you control the 50% owner of your half 100% of the time and the power is consolidated with you.  The ownership is still the same.  The broker still owns 10% of the 50% stake (netting 5% still) but you’ve increased your power and limited a potential thread (which is the broker siding with the equity partner and outvoting you.

To see how this works in a flow chart, please visit: [https://imgur.com/a/qpsABs9](https://imgur.com/a/qpsABs9)  where I’ve put together a little visual showing the difference.  Same outcome for the broker, but better for you.

Now, why would you give 5% to a broker?  Maybe they brought you the relationship that invested millions in this deal or a different one.  Maybe you were just starting out and wanted to be taken seriously by the broker so above the full commission you plan to pay, you give 5% of the deal (as McNellis has suggested in his intro book).  

I know this may seem like common sense but I can't tell you the number of times I've seen a mistake in the structure of a deal like this.  Even if you're on good terms with anyone, always protect yourself and be mindful and always approach every step of your development with intent. 

Hope this is helpful to someone!  As always, questions are welcome.  Or, if you have a different way of structuring your deals, please share in the comments! 

\-HYD-
[{"id": "goqtjg1", "text": "Not a tax person but if you let a broker roll a commission into a deal they\u2019ll still have to pay phantom income tax on the commission amount. HOWEVER if they come in as a subordinate member with their pay out coming after a return of capital to the cash investors they can defer it and pay cap gains. So like cash flow is 100% to the equity, capital is returned, then 100% to broker until he\u2019s fully paid, then hit the waterfall.\n\nETA this also dilutes the broker in the structure so it mitigates any issues they might cause since their pro-rata share is 0 until a capital event allows them to step up their equity from a subordinate position to joining the capital stack. Again though I\u2019m not a tax attorney if you\u2019re a broker doing this you should probably talk to one first. I\u2019ve seen this on a handful of deals, not really that common in my world.", "replies": [], "depth": 1}, {"id": "gorfwm0", "text": "Always quality information! Thanks for the post.", "replies": [], "depth": 1}, {"id": "goru524", "text": "This is solid. Thanks for sharing this.", "replies": [], "depth": 1}, {"id": "gos13vi", "text": "I'd potentially be happy to do so, but I've always been told that I can't directly compensate a third-party broker or other non broker/dealer type for raising capital?", "replies": [{"id": "goskyej", "text": "A non broker dealer broker can be compensated if he brings an accredited investor to the table and is paid a flat fee, not a percentage and the fee is not based on the success of the project.", "replies": [{"id": "gosqsc4", "text": "Awesome. Thanks.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gotn52h", "text": "This works but I feel is overcomplicating it. Hire a good lawyer that can draft the entity docs such that your distribution sharing percentage is unrelated to the ownership and voting percentages. It is extremely easy to write an entity where investor A is getting 85% of the distributions but developer retains 100% ownership and voting rights. You can also structure them where voting rights are fully retained by a minority owner of the entity. Or, depending on your state laws, you can write it to where one member is appointed sole manager and voting rights are held only by that manager. Doling out part of your SPV works and accomplishes the goal as written in OP's scenario but also opens you to liability due to their ownership in your SPV. I currently am working a deal where in one LLC, there are 7 members, with the sole managing member also being the sole voting member despite owning only 3% of the entity. You can also do A/B shares but I don't like them as they tend to overcomplicate things and most people can't wrap their head around them. Moral of the story, always have a lawyer who understands real estate putting your entity structure together. Not legal advice, consult your lawyer, etc.", "replies": [], "depth": 1}, {"id": "gotwxci", "text": "Watch out for creating phantom income since you can\u2019t give equity away with a tax event. I\u2019ve  given brokers a \u201cprofits interest\u201d in deals and made it clear in the document that is economic profit only. No voting. No power.  Just money if we make money.", "replies": [], "depth": 1}]