Chapter 5
What the Firm Earns
Lorraine called at twenty to seven on the Thursday morning after the pass, while the coffee was still dripping. Maya had come in from a night shift a few minutes before. She was sitting at the kitchen table in her scrubs with her shoes kicked off under the chair, eating cereal out of the box a handful at a time.
“I’m in the car,” Lorraine said, “so this will be short.”
“How did you know? Before I told you.”
“It’s a small business, and I’ve been in it a long time.” He heard her turn signal tick and stop. “When does the list come?”
“Tomorrow.”
“Read it tomorrow. Read it twice, all the way through, before you say a word about it to anybody in that building.”
“And then?”
“Have you filled in my page?”
His jacket hung on the hook by the garage door. He looked at it.
“No.”
“Do that before you decide anything else.” There was road noise on the line for a few seconds. “I’m sorry about the anchor, Andy. It was a good anchor.”
She was gone before he could thank her. Maya had stopped eating and was watching him over the top of the box.
“Lorraine?”
“Lorraine.”
“Is it bad?”
“It’s fifty million dollars.”
Maya weighed that the way she weighed an order that looked wrong on the screen. “Is anybody sick?”
“No.”
“Then it’s money,” she said. She folded the top of the box closed, set it back in the pantry and went upstairs, and a minute later he heard the shower start. Andy poured his coffee and drank it standing at the counter with his eyes on the jacket.
Travis Oyler’s findings came in at half past four on Friday, a short letter on top and the list underneath. Andy printed it and read it twice at his desk before he did anything else, the way Lorraine had told him to and the way Russ said he had. Russ had called it a fair list. It was.
He did not read it to anybody. Over the holidays it went everywhere he went, in the side pocket of his bag, and he took it out more often than he meant to. Each time he read it he found a new line to be angry about, and by New Year’s he could have recited most of it, along with the name of the person he held responsible for each line.
He waited until everyone was back. On the first Monday of January, at nine, the whole firm was in the conference room downstairs. Twenty-two people did not fit around the long table, so the ones who came in last stood along the wall by the window with their coffee. Andy stood at the head of the table with his laptop open and the list up on the screen at the far end of the room.
He went down it a finding at a time and read each one aloud in Travis’s words, which were flat and exact and did not leave much room.
No minutes are kept of investment committee decisions.
He looked down the table at Scott, Wyatt and Maggie. “Three of you sat in those meetings.”
An allocation policy is dated 12 October 2026. When reviewed on 5 November, its log contained no entries.
He looked at Anika. Anika kept her eyes on the screen.
Differences between the administrator’s waterfall calculation and the controller’s workbook are resolved by the controller, without independent review.
“Tom.”
Tom nodded once. He held his reading glasses in his hand.
Correspondence sent to an investor during fieldwork contained a figure that did not agree with source documents and had been drafted with a tool the firm had not approved.
Andy did not say a name. Nadia, halfway down the right side of the table, read the line on the screen to its end and then read it again.
The firm has no written policy governing the use of AI tools with firm or investor data.
“Nobody wrote one.”
The firm has no succession plan for its chief executive. Investment, allocation and investor decisions are concentrated in one individual.
He read that one quickly and clicked past it to the blank slide at the end. Then he put the clicker down and looked at the room.
“This cost us fifty million dollars,” he said. “Fifty million. Russ Whitlow told me we weren’t ready for a check with an extra zero, and every line on that list is somebody’s desk.”
Nobody moved. Arturo Ybarra was standing by the window with his arms folded, and Andy saw his jaw tighten and stay that way.
“Every one of those gaps has everyone’s name on it, Andy. Yours included.”
Andy felt the heat come up into his face.
The screen at the far end of the room was blank. He went back up the list without it, as he had all through the holidays, and this time he found a different name. The committee had approved every deal in his office, and he had never once asked anyone to take a note. Every allocation before October had been his call. Nobody had written a policy for the tools, because he had never asked anyone to. The last line on the list had his title on it.
He pulled out the chair at the head of the table and sat down. The room waited.
“Arturo’s right,” he said. “I built a firm where twenty-two talented people are the infrastructure. That one’s on me.”
The room stayed quiet. Then Arturo unfolded his arms, picked up the empty water pitcher from the middle of the table, and went out across the hall to the kitchen. Andy heard the tap run. Arturo came back, set the full pitcher down in front of him, and returned to his place by the window.
At five Andy stopped at Maggie’s door. It was open, and she had Tom’s draft of the year-end schedules spread across her desk in three piles.
“Lorraine left me a blank in October,” he said. “I should have brought it to you before the holidays. The first piece.”
“With your chair paid at market,” Maggie said. She went on sorting the piles.
“You’ve seen her page.”
“I don’t need to.” Maggie put her pen down. “I can give you a number by Friday. Or I can give you the right one.”
“How long for the right one?”
“Tom closes the year in the middle of the month. After that I want to go through every fee dollar we billed, one at a time, and ask each one the same question. February.”
“February,” Andy said.
She opened the weekly log she kept on the corner of her desk, wrote one line in it, and went back to the piles.
Tom began letting a tool from the payables vendor code the incoming invoices to the right property ledger the Monday after the close, once Anika had read its terms. The same morning Maggie carried into her office the fee schedules Tom had pulled for the twelve months to September. Most mornings after that, when Andy reached the top of the stairs, her door was already shut.
The conference was at a resort at the foot of Camelback, the way it was every January. Beth Ann had filled two days with LP breakfasts, and Andy went to all of them and said the same true things about Fund IV at each one. In between he walked the exhibit hall. Most of it was software this year. Every booth had a screen, and every screen promised to do some part of the job by itself.
On Wednesday night he went down to the bar. It opened onto a terrace with fire pits, and the mountain was a dark shape against a sky that still had some color in it. Joanna Lindqvist was at the far end of the bar with a glass of red wine and her conference badge turned around on its lanyard so nobody could read it. She ran a firm in Denver about the size of his. They had sat on a panel together years ago and liked each other, and had not done much about it since. She saw him, and with two fingers she pointed at the empty stool beside her.
“Andy Daryani,” she said. “You look like a man who’s been in the exhibit hall.”
“Two hours.”
“Buy anything?”
“Everybody’s selling something that runs by itself.”
Joanna turned her glass slowly on its napkin. “I used to ask everybody at these what they were running,” she said. “Somewhere in there I stopped asking about tools.”
“What do you ask now?”
She took longer with that than the question needed. She watched a waiter carry a tray out to the fire pits, and she watched him come back.
“Who’s going to pay my people next year,” she said.
He ordered a bourbon. She asked about Fund IV and he told her, including the part about the anchor, because she would hear it anyway and he wanted her to hear it from him. She listened without saying she was sorry, which he appreciated.
“I’ll tell you my worst one,” she said, “since you told me yours. The first time the market shut on us, we were living on acquisition fees. Every dollar of profit came in with a closing. The closings stopped, and I let go of people I’d hired straight out of school. I’d been to some of their weddings.” She drank a little of the wine. “I decided I wasn’t going to do that twice.”
“And you haven’t.”
“Two state pension plans keep accounts with us. It’s their own money, in buildings we picked, and we run them. They pay us every quarter to run what they already own with us, whether I buy anything that quarter or not.” She set the glass down. “Last year we went most of the year without buying a building. Nobody in my office looked at payroll once.”
Andy turned that over. He tried to picture a year at Service Capital with no closings in it from January to December, and found he could not say how the year ended.
“How did you get them?”
“Slowly,” Joanna said.
She turned her badge face up, took a pen from her bag, and wrote an address on the back of it in small square letters. She slid it along the bar to him.
“Come to Denver and I’ll show you why they stay. It’s the dull part. The tenth. Bring a coat.”
It was snowing in Denver, a fine dry snow that blew across the road in long strings and never seemed to land. Joanna’s firm had the top floor of an old brick warehouse a few blocks from Union Station, with the beams left bare and a long window that looked out over the rail yards. It was quieter than his own floor. Somebody had left a pair of snow boots drying on a mat inside the door.
Joanna gave him coffee and walked him to the desk of her head of acquisitions, Mike Semper, a compact man of about forty with his sleeves rolled to the elbow. Mike pulled a second chair over without being asked and went on with what he was doing.
He screened fast. A deal came up on his screen, and he had made up his mind about it and moved to the next one before Andy had finished reading the first.
The fourth deal was a value-add property in Lakewood, and it came up already priced against a set of recent sales nearby. Mike stopped on the second sale in the set. It was a property built in the eighties, a few miles away, that had traded eight months earlier at fourteen percent below the rest.
“I know this one,” he said. “The seller was a fund winding down. They had to be out by year-end, and they took what they could get. That’s a liquidation print.” He tapped the screen. “Nothing in the sale record says so. The system can’t know.”
He tagged the sale as non-market and typed a short note on why: who the seller had been, and the deadline it had been selling against. The whole thing took him less than a minute. The note stayed with the sale.
“The system gets things wrong,” Mike said. “That part doesn’t really bother me. I fix it once and it stays fixed.”
Joanna was leaning in the doorway of her office with her own coffee. “That’s the dull part,” she said.
Mike printed the Lakewood page for Andy before he left, and Andy carried it out to the car with Joanna’s badge still in his jacket. On the way to the airport the snow thickened and the driver slowed down. Andy turned the printout over on his knee and wrote one line on the back of it.
What does this firm earn that it doesn’t have to win again next year?
He looked at it for a mile or two. Then he put the page in his bag beside the laptop.
Maggie came up the stairs at four o’clock on Wednesday the twenty-fourth of February with the fee schedules under her arm, and sat down at the round table in the corner of his office.
The schedules had gone into her office in the middle of January, and they had come out thicker. They were Tom’s record of every fee the firm had billed in the twelve months to the last Sunday in September: a line for each fund, each property, each closing and each quarter. Maggie had added a column of her own, ruled in pencil, and every line had a word in it. Most said recurs or deal. A few had only an asterisk. On top of the stack sat one typed page.
Andy came over from his desk and sat across from her. “Why September?”
“That’s the Sunday you flew home from Aspen. It’s the firm we told Walt we were.” She laid her hand flat on the stack. “Since then we’ve bought one building and lost an anchor. I didn’t want either of them in it.”
She turned the typed page so he could read it. “Start with the line everybody likes,” she said. “About fifteen million in fees. Twenty-two of us. About six hundred ninety thousand a head.”
“It’s a good line.”
“It’s the one everybody quotes.” She turned the page face down and opened the schedules. “Then I took every dollar of the fifteen and asked it one question. If we never bought another building, would this dollar come back next year?”
She ran her pen down the first page as she talked. “Management fees on the funds: recurs. Asset-management fees: recurs. The acquisition fee on a closing: deal. The disposition fee when we sell: deal. The fee on a financing or a refinancing: deal. The construction fee on a renovation budget: recurs, because across twenty assets something is always being renovated.”
“And the asterisks?”
“Last.”
She turned the typed page back over. “On what we manage today, the fees that come back are about eleven million of recurring fees. The deals, in an ordinary year with seven closes, come to about five point seven million a year.”
“Eleven and five point seven is more than fifteen.”
“That’s next year. A full year of Fund IV, and the older funds after their fees step down the way their documents say. A buyer prices the year ahead on what we already manage, so I did too.” She moved her pen to the next line. “Then what it costs us. Salaries, rent, the audit of our own books, insurance, the IT vendor, everything we spend whether we close a deal or not. About nine and a half million to run the firm.” She held the pen up. “With one change from Tom’s books.”
She turned to a page near the back of the stack where a single line was circled.
“Your pay. Tom’s books carry you at the salary you set for yourself.”
“I take the rest in distributions.”
“Whoever buys the firm has to hire somebody to sit in that chair, and for a firm our size that’s about eight hundred fifty thousand for the seat, loaded. So I put the difference back in.” She laid the pen across the circled line. “The nine and a half has you in it at market.”
Andy looked at the circled line. He had always thought of that line as the one cost at the firm that was entirely up to him.
“So,” Maggie said. “About eleven million comes in every year. About nine and a half goes out to run the place, with you paid properly. What’s left is about one point six million of recurring earnings. A margin of about fifteen percent.”
“One point six.”
“The fees that come back barely cover the cost of running the firm. Everything above that comes from the deals.” With the pen she pointed to the two figures on the typed page, one under the other: one point six, and five point seven. “Almost four-fifths of what we earn comes from closing deals.”
“The deals are good.”
“The deals are very good. They’re also the part a buyer can count on least. If nothing trades for a year, they stop. And every one of them goes through you.”
“Where’s the promote?”
“Out.” She did not look up from the page. “The promote is the number we toast at the holiday party. It comes in lumps, and it depends on what we sell and when. A buyer barely credits it, so I left it out. Our own money in the funds is out too. This is the company and nothing else.”
Andy got up, took his jacket from the hook behind his door and found Lorraine’s page in the inside pocket. He sat back down, unfolded it on the table between them and turned it to face her.
Maggie read it through once. Then she uncapped her pen and wrote a number in the empty space under the first term, small and neat. 1.6. She capped the pen.
“Her six and a half,” she said, reading it off the page. “A buyer pays about six and a half times for the one point six, and takes half off for you. That’s about five and a quarter million.”
“And the deals?”
“Her page stops at the recurring part. A buyer won’t stop there. He pays about three times for them, because he can’t count on them, and he takes the same half off, because they come through you more than anything else in this stack. That’s about eight and a half million.”
She put the pen down on top of the schedules and folded her hands over it.
“Add the two. Fourteen, give or take.”
Andy looked at the page, and then at her. “For the firm.”
“For the company we have. Put the one point six and the five point seven together and call that what we earn in a year. Fourteen is under two times what we earn.”
On the typed page, beside the fourteen, there was an asterisk in her hand.
“And that,” Andy said.
“The joint venture on the Fund II co-invest. It books our fees on its own ledger, all in one line, and its administrator has never given me a split I’d sign. Some of it is asset management. Some of it came in with the closings. I put all of it with the deals.” She touched the asterisk with the cap of her pen. “When they give me the split, some of it moves to the recurring side and the number goes up a little. I’ll tell you how much.”
Andy leaned back. Next Wednesday the firm would be thirteen years old.
“Thirteen years, three funds, a fourth raising, and we’re worth a number I’m almost embarrassed by,” he said.
Maggie held his eyes.
“Right now we’re a well-paid group of people,” she said. “The market can tell the difference between that and a company.”
She stood, left the schedules where they were and took the typed page with her. At the door she stopped as if she might say something else, and then went out.
Andy folded Lorraine’s page along its old creases, with the number inside it now, and put it back in his jacket. Then he pulled the schedules over, turned them to the first page and began to read them from the top, the way he read a seller’s operating statements before he made an offer.