Rent Roll Interests Explained: Keeping Your Best PMs Without Giving Up Shares
O*NO! "We need to talk..." Those words from your star property manager can make your heart sink. You know what's coming – they want more skin in the game. They've helped build your rent roll into a thriving business, and now they want their piece of the pie. But here's the thing: you're not ready to give up any shares in your company. Good news! There are smart ways to give your valuable team members an interest in the rent roll without handing over actual shares. Let's break it down in in this blog.
Understanding Rent Roll Interests
Think of your rent roll like a golden goose – it keeps laying eggs (rental income) and becomes more valuable over time. Giving your key employees an interest in this valuable asset can be a win-win. They get motivated by having a stake in the business's success, and you get to keep them around longer. Plus, when they're personally invested in growing the rent roll, they'll work harder to bring in new properties and keep existing ones.
But why not just give them shares? Well, shares come with baggage – voting rights, access to company financials, and complicated legal obligations. Sometimes you just want to reward good performance without those other obligations. It's like letting someone enjoy the fruits of the garden without giving them ownership of the land.
Different Forms of Interest: Sale Value vs. Operating Profit
There are two main ways to give someone an interest in a rent roll without sharing actual ownership:
Future Sale Value Interest: This is like promising someone a percentage of the selling price when you eventually sell the rent roll. For example, "When we sell the business, you'll get 10% of whatever the rent roll sells for above today's value."
Operating Profit Interest: This involves giving someone a slice of the ongoing profits from managing properties. Think of it as sharing the eggs from the golden goose, but not the goose itself.
The tricky part with profit sharing is defining what "profit" actually means. Remember, profit can be affected by how much the company spends on things like marketing, staff, or that fancy new office coffee machine. It's important to clearly spell out how profit will be calculated and who gets to make spending decisions.
The Big Question: Whole Pie or Just Their Slice?
Now here's where it gets interesting: should your employee's interest cover the entire rent roll, or just the properties they bring in? Both approaches have their merits:
Whole Rent Roll Interest –
Pros: Simpler to calculate, encourages teamwork
Cons: Might reward them for others' hard work
Individual Portfolio Interest –
If you decide to go with just their slice, you'll need clear rules about what counts as "their" property. Here are some approaches:
Direct sourcing: Only properties they personally bring in
Team contribution: Properties they helped secure or manage
Hybrid approach: Different percentages for directly vs. indirectly sourced properties
Consider setting rules for –
Properties from their personal network
Properties from their marketing efforts
Referrals they handle
Key Takeaways
You can reward key employees with rent roll interests without giving up company shares
Two main types: future sale value interest and operating profit interest
Clear definitions of profit and control are crucial
Carefully consider whether to base the interest on the whole rent roll or just their portfolio
Document everything clearly to avoid future disputes
Your Next Steps
Ready to set up a rent roll interest arrangement that works for everyone?
Book a FREE 10 minute chat with our real estate agency law experts today.
Remember: A well-structured rent roll interest arrangement can be the difference between keeping your star performers and watching them become your competition. Let's make sure you get it right the first time!
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.