Properly motivating commercial real estate employees to increase net operating income can have a tremendous impact on the valuation of the property. We often utilize a unique profit share plan that creates strong incentives for increasing cash flow while guarding against ploys that “game the system.” The program’s ability to boost NOI makes it particularly advantageous during the 12 to 24 months leading up to asset sale

Buildings often have catalysts for cash flow growth including recent repositioning efforts and strong market fundamentals. Yet, achieving that growth is often dependent on the ability of the property manager and the maintenance supervisor to optimize the performance of the property. For example, maintenance supervisors can be exceedingly frugal or wasteful in regards to labor, materials, and use of expensive outside contractors.

The plan pays a bonus to select employees based on the quarterly increase of NOI, with certain adjustments. Adjustments typically include eliminating property taxes, insurance, and sometimes utilities as employees have little impact on these expenses. We always adjust for any changes in accounts receivable (A/R) because increasing A/R means less cash in the bank. As we tell our employees, “You aren’t making money if you aren’t collecting money.”  Our typical formula is: Profit Share NOI = NOI + Property Taxes + Insurance + Change in A/R

The plan’s financial reward is based on the Profit Share NOI achieving specified quarterly growth results. An example of growth targets and corresponding profit share bonus percentages is provided in the nearby table.

To illustrate with an example, assume Profit Share NOI increases by $10,000, reflecting a 2.5% growth rate.  As 2.5% is a Level I growth target, the bonus pool calculation is: 12% x $10,000 = $1,200. 

The bonus is subject to a 50% holdback which is paid only if the growth in the following quarter is equivalent to the same level or one level below that achieved during the bonus period. The holdback ensures consistent effort to increase NOI, discourages gaming of the system, and helps retain employees. The amounts we pay out in bonuses are relatively small in comparison to the cash flows of the property, but are very significant to property level employees who are typically making modest incomes.

We typically select property managers, maintenance supervisors, and district managers as participants in the profit share. An allocation percentage that we recommend is: property manager – 40%; maintenance supervisor – 40%; and district manager – 20%.

Creating proper incentives for property based employees can achieve greater cash flow at a time when the asset is being positioned for sale. Paying cash bonuses, in a well devised program that prevents “gaming the results,” will optimize the value of your asset.