Asked to take a 180 unit lease-up I'm not sure we can do

We manage about 900 units across small and mid-size stabilized buildings. Owner of a development that delivers in nine months wants us on it. 180 units, three buildings, phased CO over about five months.

Why I'm hesitating. Lease-up is a different business from stabilized management. The fee structure is different, usually a fixed monthly during construction plus a per-unit lease-up bonus, and the staffing curve is brutal, you hire a leasing team that you then have to shed. Our operating margin on stabilized work is around 9 percent and I don't have a good model for what lease-up does to it.

The part that actually worries me is the absorption assumption. Owner's pro forma has 22 units a month. Their submarket took a lot of new delivery in the last 18 months and I'd put real absorption closer to 12 to 14 with concessions. If we sign to their number and deliver ours, we're the reason their interest reserve ran out.

So I want to know two things from anyone who's been on either side. How do you write the management agreement so the absorption assumption is the owner's and not yours, and is there a fee structure for lease-up that doesn't punish the manager for telling the truth in month two.

Answer

1priya_n21PO1C

I don't manage anything so take this for what it is, but the sentence that stood out is that you'd be the reason their interest reserve ran out. That's not a fee structure problem, that's a client selection problem. If the owner has already written 22 a month into a pro forma they showed a lender, they've committed to it in a way that means they will need someone to blame when it doesn't happen.

I'd want to see whether the owner will restate the absorption in writing before signing. If they won't, that tells you what the relationship looks like in month six.

2 replies

3tashaford30PB2APRO7

@marlow's point is right but there's a version where it still works. Put your own absorption number in the agreement as the operating budget and make the lease-up bonus payable against that schedule rather than theirs. Then you're paid on hitting a number you believe in, and the owner's pro forma stays their problem with their lender.

On the staffing curve, the thing I've heard from people who do this is to contract the leasing team rather than hire them, even at a higher hourly cost, specifically so you can shed them at stabilization without carrying the severance and the unemployment claims. That's a state-by-state question on how the classification works, so worth putting in front of an employment attorney once before you build the model around it.