A cautionary case on quoting a management contract off someone else's lease up pro forma

Take a 28 unit new build in a designated opportunity zone tract that opens partly leased in early 2024. A management contract quoted off the operator's pro forma, which projected stabilization at month six, 1,395 average rent, and 6 percent economic vacancy after that, is a useful case study in what can go wrong. In this scenario, actual stabilization takes until month 14, average rent lands at 1,190, and staff hours run well past what the fee covers. At a 6 percent of collections fee structure, 1,395 average rent with 26 units occupied works out to about 2,700 a month. At 1,190 with only 17 units occupied through most of the first year, the fee drops to closer to 1,400, against a leasing effort that can consume most of a full time staff member's week. Running roughly 1,900 a month negative on a contract like that for a year adds up to around 22,800, before counting the other deals turned away because staff were tied up. The lesson in a case like this is that a percentage fee priced off someone else's lease-up assumption, without an independent market check, is a mistake that sits entirely on the party who quoted it. Comps in a tract like this often top out well below the pro forma number, something an afternoon of research would surface. New buildings in submarkets with no recent rental history at a given price point are common precisely because nothing has been built there in decades, which is often exactly why the tract carries the designation in the first place. The better structure for a lease-up contract is a flat monthly fee, not a percentage of collections that don't yet exist, with the flat fee running until a defined occupancy threshold rather than until a date on the developer's schedule. Making an independent rent comp study a condition of quoting is the other change worth making before ever pricing a lease-up deal again.