NOTE 12 — EQUITY-BASED COMPENSATION

Partnership Unit - Based LTIP Plan

On December 22, 2010, in connection with the closing of the IPO, the Board of Directors of QRE GP adopted the QRE GP, LLC Long Term Incentive Plan (the “Plan”) for employees, officers, consultants and directors and consultants of QRE GP and those of its affiliates, including QRM, who perform services for us. The Plan consists of unit options, restricted units, phantom units, unit appreciation rights, distribution equivalent rights, other unit-based awards and unit awards. The purpose of awards under the long-term incentive plan is to provide additional incentive compensation to employees providing services to us and to align the economic interests of such employees with the interests of our unitholders. The Plan limits the number of Common Units that may be delivered pursuant to awards under the plan to 1.8 million units. Common Units cancelled, forfeited or withheld to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards.

Restricted Units

During 2012 and 2011, we issued restricted stock units with a service condition (“Restricted Units”) and, in 2012, we issued restricted units with a market condition (“Performance Units”). The fair value of the Restricted Units is based on the closing price of our common units at the grant date. The fair value of the Performance Units is based on a lattice model as discussed below.

Service Restricted Units

For Restricted Units, we recognize compensation expense using a straight-line amortization of the grant date fair value over the vesting period of the award. For the years ended December 31, 2012 and 2011, and the period from December 22, 2010 to December 31, 2010, we recognized compensation expense related to the outstanding awards of $3.1 million, $1.4 million and less than $0.1 million, respectively. As of December 31, 2012, we had 550,241 of Restricted Units outstanding with unrecognized grant date fair value compensation expense of $8.2 million, which we expect to be recognized over a weighted-average period of approximately 2.4 years.

Performance Restricted Units.

During 2012, we granted a target number of performance awards under a performance unit award agreement to members of our senior management. The performance awards will be earned over a three year period based on the Partnership’s performance relative to its peers in accordance with the Plan. The final shares to be issued will range from 0 – 225% of the initial shares granted. For Performance Units, we recognize compensation expense using a straight-line amortization of the grant date fair value over the performance period.

The following assumptions were used for the Performance Units based on market conditions using a Monte Carlo model to estimate the grant date fair value of the awards. The four primary inputs for the Monte Carlo model are the risk-free rate, volatility of returns, correlation in movement of total unitholder return relative to a relevant peer group and the expected distribution rate. Risk-free rate was based on the Federal Reserve for treasuries equal to the remaining duration of the performance period, which was 0.4% for the 2012 grants. Volatility was determined based on the annualized daily historical volatility, which ranged from 31% to 32% for the 2012 grants. Correlation in movement of total unitholder return was determined based on a correlation matrix that was created which identifies total shareholder return correlations for each pair of companies in the peer group, including the Partnership. The paired returns in the correlation matrix ranged from 40.0% to 73.8% for the Partnership and its peer group. The expected distribution rate is calculated using a trailing six month average for the Partnership and its peer group as of the date of grant, which was 10% for the 2012 grants. Based on these inputs discussed above, a ranking was projected identifying the Partnership's rank relative to the peer group for each award period which determines the anticipated payout. The weighted average grant date fair value per unit, using the method described above, was $10.35 and is being recognized ratably in expense over the service period.

For the year ended December 31, 2012, we recognized compensation expense related to the outstanding awards of $0.2 million. There was no compensation expense for the Performance Units during 2011 or the period from December 22, 2010 to December 31, 2010. As of December 31, 2012, we had 118,082 of Performance Units outstanding with unrecognized grant date fair value compensation expense of $1.0 million, which we expect to be recognized over a weighted-average period of approximately 2.6 years. The amount of unrecognized compensation expense does not necessarily represent the amount that will ultimately be realized by us in our statements of operations.

The following table summarizes the Partnership’s unit-based awards for the year ended December 31, 2012 and 2011, and from December 22, 2010 through December 31, 2010 (in thousands, except per unit amounts):


	Number of			Number of
	Unvested	Weighted		Unvested	Weighted
	Service	Average		Performance	Average
	Restricted	Grant-Date		Restricted	Grant-Date
	Units	Fair Value		Units	Fair Value
Unvested units, December 22, 2010	-	$	-	-	$	-
Granted	148		20.03	-		-
Forfeited	-		-	-		-
Vested	-		-	-		-
Unvested units, December 31, 2010	148	$	20.03	-	$	-
Granted	215		20.51	-		-
Forfeited	(39)		20.75	-		-
Vested	(53)		20.31	-		-
Unvested units, December 31, 2011	271	$	20.26	-	$	-
Granted	437		18.22	121		10.35
Forfeited	(61)		19.47	(3)		10.45
Vested	(97)		20.05	-		-
Unvested units, December 31, 2012	550	$	18.80	118	$	10.34

Predecessor Compensation Plans

Long-Term Incentive Compensation Plan

In April 2009, the Predecessor adopted a Long-Term Incentive Compensation Plan "Agreement" for its executive officers and other key employees. These employees receive certain interest, as defined below, in distributions received by the Predecessor through its subsidiaries. During the period ended December 21, 2010, the Predecessor recognized compensation expense of $1.6 million in equity-classified awards and $1.9 million in liability-classified awards. These awards are based on certain performance measurements and service. Interests awarded are based on the type of interest held by the Predecessor or its subsidiaries as follows:

The Predecessor General Partnership (Funded) Interest

The Predecessor contributes to the Fund 3% of all equity contributions made to the Fund and receives 3% of any distributions made by the Fund ("GP Funded Interest"). A special class of limited partnership interest in the general partner of the Fund was created to give executive officers and other key employees an interest in the GP Funded Interest after the Predecessor has recouped a portion of its total capital contributed to the Fund until each employee has received a cumulative amount equal to his vested share of the GP Funded Interest. Employees awarded this interest vest 15% on each of the first five anniversaries of the effective date and the remaining 25% vests if employed upon the disposition of substantially all of the assets of the Fund.

Employees of the Predecessor received GP Funded Interest grants in 2010 and 2009. The estimated fair value, at the date of the grant, is recognized as long-term incentive compensation in general and administrative expense in the statement of operations ratably as the awards vest. Estimated forfeitures will be adjusted to reflect actual forfeitures in future periods. We account for these profits interests as equity awards, and we estimated the fair value of these interests using a Probability Weighted Expected Return Model (“PWERM”). The PWERM forecasts expected cash flow scenarios specific to each award, assigns probability weights to these scenarios, then discounts the sum of the probability weighted cash flows to a grant date present value using a risk adjusted discount rate. The scenarios represent possible outcomes for each award based on assumptions about investment horizon, cash flow amounts and timing, asset values, commodity prices, equity investment amounts, and return on investment. The Predecessor assumed a zero percentage forfeiture rate for all years when determining the fair value of the GP Funded Interest.

The estimated aggregate fair value of the equity component of the awards at the date of grant was $0.3 million during the period ended December 21, 2010. The Predecessor incurred non-cash compensation expense related to the GP Funded Interest awards of $0.2 million for the period ended December 21, 2010 and December 31, 2009. The 2009 expense was recorded in 2010. Refer to “Out-of-Period Adjustments” further below. In addition there is a liability component to the award related to the 25% that vests and will be expensed upon substantial disposition of the Fund assets with a fair value of $0.7 million at December 21, 2010.

Activity related to the GP Funded Interest is as follows:


			Weighted
			Average
	% of		Grant Date
	Interest		Fair Value
	Granted		Per 1%
Nonvested GP Funded Interests as of December 31, 2009	72.82	%	$	57,512
Granted	22.05	%		88,206
Forfeited	0.00	%		-
Nonvested GP Funded Interests as of December 21, 2010	94.87	%	$	145,718



Nonvested GP Funded Interests as of December 31, 2009	72.82	%
Granted	22.05	%
Vested	(10.92)	%
Forfeited	0.00	%
Nonvested GP Funded Interests as of December 21, 2010	83.95	%

The Predecessor General Partner Promote Interest

After all investors in the Fund have received a return of their equity contributions plus a return of 8%, the Predecessor is entitled to receive 14% of all amounts distributed thereafter, including a catch-up on the amount distributed as part of the 8% return to all investors ("GP Promote"). A special class of limited partnership interest was created to award executive officers and other key employees 100% of the interest in the GP Promote until distributions attributable to the GP Promote aggregate $12,800,000 and, thereafter 39% of the distributions attributable solely to the GP Promote. Employees awarded this interest vest 15% on each of the first five anniversaries of the effective date and the remaining 25% vests if employed upon the disposition of substantially all of the assets of the Fund.

Employees of the Predecessor received GP Promote grants in 2010. The estimated fair value, at the date of the grant, is recognized as compensation in general and administrative expense in the statement of operations ratably as the awards vest. Estimated forfeitures will be adjusted to reflect actual forfeitures in future periods. In accordance with GAAP, we estimated the fair value of these interests using a Probability Weighted Expected Return Model (“PWERM”). The PWERM forecasts expected cash flow scenarios specific to each award, assigns probability weights to these scenarios, then discounts the sum of the probability weighted cash flows to a grant date present value using a risk adjusted discount rate. The scenarios represent possible outcomes for each award based on assumptions about investment horizon, cash flow amounts and timing, asset values, commodity prices, equity investment amounts, and return on investment. The Predecessor assumed a zero percentage forfeiture rate for all years when determining the fair value of the GP Promote.

The estimated aggregate fair value of the equity component of the awards at the date of grant was $0.3 million during the period ended December 21, 2010. The Predecessor incurred non-cash compensation expense of $0.2 million and $0.1 million for the periods ended December 21, 2010 and December 31, 2009. The 2009 expense was recorded in 2010. Refer to “Out –of-Period-Adjustments” further below. No amounts have been forfeited. In addition, there is a liability component to the award related to the 25% that vests and will be expensed upon substantial disposition of the Fund assets with a fair value of $1.1 million at December 21, 2010.

Activity related to the GP Promote Interest is as follows:


			Weighted
			Average
	% of		Grant Date
	Interest		Fair Value
	Granted		Per 1%
Nonvested GP Promote Interests as of December 31, 2009	78.83	%	$	71,534
Granted	17.45	%		97,544
Forfeited	0.00	%		-
Nonvested GP Promote Interests as of December 21, 2010	96.28	%	$	169,078


Nonvested GP Promote Interests as of December 31, 2009	78.83	%
Granted	17.45	%
Vested	(10.92)	%
Forfeited	0.00	%
Nonvested GP Promote Interests as of December 21, 2010	85.36	%

Purchase/Carry Interests

The Predecessor, through a subsidiary purchases a 2% interest in each property acquired by the Fund and also receives a 2% carried interest in each property acquired by the Fund. A special class of limited partnership interests in the Predecessor was created and awarded on April 1, 2009 to two senior executive officers in the aggregate of 19.5% of the distributions made by the subsidiary ("Purchase/Carry Interest") excluding an amount that represented the net agreed value of the subsidiary assets on the date of grant. The Purchase/Carry Interests vest (i) 50% upon the effective date of the grant (ii) an additional 7.5% on each of the first five anniversaries following April 1, 2009 and (iii) the remaining 12.5% vest if employed upon the disposition of substantially all of the assets of the Fund. In addition, the executives must be employed as of the Fund’s investment period, currently June 30, 2011, and the Fund must achieve a 1.5X return on its total capital investment, as defined by the Agreement.

The estimated fair value, at the date of the grant, is recognized as compensation in general and administrative expense in the statement of operations ratably as the awards vest. Estimated forfeitures will be adjusted to reflect actual forfeitures in future periods. In accordance with GAAP, we have accounted for the fair value of the Purchase/Carry Interests as equity awards, and we estimated the fair value of these interests using a Probability Weighted Expected Return Model (“PWERM”). The PWERM forecasts expected cash flow scenarios specific to each award, assigns probability weights to these scenarios, then discounts the sum of the probability weighted cash flows to a grant date present value using a risk adjusted discount rate. The scenarios represent possible outcomes for each award based on assumptions about investment horizon, cash flow amounts and timing, asset values, commodity prices, equity investment amounts, and return on investment. The Predecessor assumed a zero percentage forfeiture rate for all years when determining the fair value of the Purchase/Carry Interests.

The estimated aggregate fair value of the equity component of the awards at the date of grant was $1.8 million. The Predecessor incurred non-cash compensation expense of $0.6 million and $0.4 million for the periods ended December 21, 2010 and December 31, 2009. The 2009 expense was recorded in 2010. Refer to “Out-of-Period Adjustments” further below. No amounts have been forfeited. In addition, there is a liability component to the award related to the 12.5% that vests and will be expensed upon substantial disposition of the Fund assets with a fair value of $0.3 million at December 21, 2010.

Activity related to the Purchase/Carry Interests is as follows:


			Weighted
			Average
	% of		Grant Date
	Interest		Fair Value
	Granted		Per 1%
Nonvested Purchase/Carry Interests as of December 31, 2009	100.00	%	$	13,278
Granted	0.00	%		-
Forfeited	0.00	%		-
Nonvested Purchase/Carry Interests as of December 21, 2010	100.00	%	$	13,278


Nonvested Purchase/Carry Interests as of December 31, 2009	100.00	%
Vested	(7.50)	%
Forfeited	0.00	%
Nonvested Purchase/Carry Interests as of December 21, 2010	92.50	%

Performance Cash Deferred Compensation Plan

In April 2009, the Predecessor established a bonus plan ("Bonus Pool") for certain key employees to award these employees upon the Fund achieving certain performance targets and service by the employee. If the Fund achieves a 1.75X return on its total capital investment ("1.75X ROI") as defined in the plan, a Bonus Pool of $12.5 million will be established for the employees. If the Fund achieves a 2.0X return on its capital investment the Bonus Pool will be increased to $15 million.

Each employee will vest in a pro-rata share of the Bonus Pool, as determined by their offer letter, 15% per year from the date of the grant for five years and 25% upon the disposition of substantially all of the assets of the Fund. The employee must remain employed for the vesting period and must be employed on the date upon which the disposition of substantially all of the assets of the Fund occurs.

During the fourth quarter 2010, the Predecessor determined that it was probable to meet the 1.75X ROI and has recorded $1.9 million of compensation expense in general and administrative expenses in the statement of operations for the year ended December 21, 2010. These awards are liability-classified awards as they will ultimately settle in cash.

Out of Period Adjustments

During 2010, the Predecessor recorded adjustments related to 2009 which decreased its income for 2010 by $0.6 million as a result of compensation expense which should have been recorded in 2009.

After evaluating the quantitative and qualitative aspects of these errors, the Predecessor concluded its previously issued financial statements were not materially misstated and the effect of recognizing these adjustments in the 2010 financial statements were not material to the 2010 results of operations, financial position and cash flows.