Should the operator get an asset management fee during the hold, or wait for the promote

Worth pinning the vocabulary down, since the whole argument turns on it. The promote is the extra share of profit the operator receives above what his 5 percent contribution would earn on its own. The fee is separate from that and does not reduce it at all. Laid out that way, the fee reads as the operator being paid twice for the same work, and that is the question to make him answer plainly before anyone signs.

@raj_mehta14 you have the definitions right but the conclusion doesn't follow. The promote pays for outcome and the fee pays for labor, so they are compensating different things. A property doesn't manage itself for three years on the strength of a future payday. The question that matters is where in the payment order the fee sits, @angela_burke. "Paid monthly out of operations" can mean above the debt service, above your pref, or below both. Same 1.5% number, completely different risk. Ask for the fee to sit behind your preferred return, so if the deal isn't hitting, his fee accrues instead of paying. That is the version worth signing.

One and a half percent of what, exactly. Agreements define that base as invested equity, as total capitalization, as gross revenue, and sometimes as total project costs including reserves, a base that grows every time the operator calls capital. Nobody ever decides it should grow. It just does. @angela_burke, on invested equity at $600k the fee has a ceiling you can see. On total capitalization with $1.4m of debt behind it, 1.5% is $30k a year, and the two sentences look identical at a glance. Pin the base. Then pin whether it is paid on contributed capital or committed capital, because on a deal that draws over 18 months those are different numbers for most of the hold.

Run it both ways and the shape is clear. On a five year hold, $9k a year of fee is $45k. If you instead give him five points more promote above an 8% pref and the deal exits at a 17% IRR, he ends up ahead of the fee version. If it exits at 9% he ends up well behind it. So the no fee, bigger promote trade is you paying more in the good case to pay nothing in the bad case. That is insurance and it is priced like insurance. Whether it is worth it depends on how wide you think the outcome range is on this specific deal. On a stabilized building with a fixed rate loan, take the fee version and keep the promote tight. On a heavy reposition you want him hungry.

@dpatel_re that is the clearest framing in the thread. The fee question is an insurance question, and almost nobody says so out loud.

The thing I've learned checking a lot of these is that the asset management fee is rarely the fee that hurts. It's the acquisition fee, the disposition fee, the refinance fee, the construction management fee on top of the general contractor's own overhead, and the affiliated property management agreement at slightly over market. Add those and 1.5% annually is the small line.

@angela_burke, ask him for a single page listing every dollar that will ever go to him or any entity he owns, over the whole life of the deal. Not the operating agreement, a plain list. How he reacts to that request is itself information.

@marcus_hale41's one page list request is going straight into my notes for the syndication I've been looking at, even though I'm nowhere near a JV myself. I hadn't thought to just ask for it in that form.

The payroll argument is real, @angela_burke, and anyone on the vendor side of this business sees it constantly. An operator with zero current income does take side work, and then your building gets the leftover hours. Service contractors can tell which owners are distracted, because nobody answers the phone until something floods. But $750 a month is a partial offset, well short of payroll. If his overhead genuinely requires $9k a year from this deal to function, he's undercapitalized as a business and this deal is subsidizing that. Ask how many deals he needs running at once for his company to break even. If the answer is four and he has two, you're funding the gap.

@monica_tran3 that break-even question is better than anything in the operating agreement. An operator asked what the fee has to cover before he is working for free has to answer it honestly, and the honest answer is usually revealing.

I'll take the unpopular side since I'm the operator in this picture on my own deals. I hit the ceiling last year exactly because I had no current income from the assets I was running and I ended up taking on brokerage work to eat. My existing partners got worse attention that year and I couldn't tell them why without admitting the fee I'd waived was the reason.

A fee that accrues and pays when cash flow allows, which is @dmitri_248's version, is the one I'd have taken and it would have solved it. Zero fee sounds like alignment and it produces a distracted operator. @angela_burke, the fee isn't the thing to fight over. Fight over the affiliate management agreement and the promote hurdle.

Subordinate to the pref is the right answer here. @samantha_ruiz's post is the reason a zero fee structure does not hold up, and @wendy_park48's is the reason nobody should agree to the fee without nailing down the base it gets calculated on.