A 15 percent parts markup buried in a management agreement is worth reading for before it costs you
For a limited partner in a 96-unit apartment deal, reading the property management agreement before funding, not the operating agreement, the separate contract between the ownership entity and the company running the property day to day, is worth doing even on a small check, since most investors never ask to see it. A clause several pages in permitting the manager to purchase materials and supplies through an affiliated entity, charging the property cost plus a reasonable administrative markup, is a common structure worth watching for. "Affiliated" typically means a company owned by the same people as the manager, and "reasonable" is often left undefined. Asking the sponsor directly for the actual number is a fair question, and getting an answer sometimes takes more than one email. On a 96-unit property with materials and supplies budgeted around $58,000 a year, a 15 percent markup routes roughly $8,700 a year to a company owned by the manager, on top of a separate management fee, all of it coming straight out of net operating income, which is what distributions are paid from. That is not fraud, and it is technically disclosed in the sense that the clause exists in the document, but it is money worth questioning. A single paragraph to the sponsor asking whether the markup could be capped, and noting that other investors would likely raise the same question at the annual meeting, is often enough to move the number. A cap at 5 percent, with a requirement that any single purchase over $2,500 gets three outside quotes, is a realistic outcome, saving a property in this range something like $5,800 a year. The lesson worth keeping: that kind of clause exists in a lot of management agreements because nobody asks.
