Would an LP rather a sponsor take real fees and a small promote, or almost no fees and a large one

That framing is a useful way to compare sponsor economics. One thing worth noting: 1% of collected revenue on a 130-unit deal is real money, maybe $18k a year, which isn't nothing. So the lower-fee sponsor isn't eating air, just eating less. That's worth folding into the alignment argument.

@chriswalton8, it changes it a little. $18k a year doesn't fund a team though, it funds part of one person. My worry with B is who's actually doing the asset management in year three when the fun part is over.

Run the numbers before arguing about philosophy. On a $2.5M raise with a $7M purchase, Sponsor A takes roughly $140k at close and disposition combined plus $35k a year, call it $315k over five years. Sponsor B takes about $35k at close plus $18k a year, call it $125k. So the fee difference is $190k over the hold, which on $2.5M of equity is about 7.6 points of total return. Then the question becomes what B's fatter promote costs at various exits. If the deal returns a 14% IRR, B's split probably costs more than the $190k saved on fees. If it returns 9%, B is cheaper and A is getting paid for a mediocre outcome. So the real question isn't which structure is better, it's what return is actually expected.

Read both operating agreements before deciding, because the headline terms quoted are maybe half the story. Things worth checking on B specifically: is the pref cumulative and does it compound, is there a catch-up tier before the 60/40 that has not been disclosed, is the 16% IRR measured on contributed capital or on some other base, and can the GP be removed and by what vote. On A, check what collected revenue includes and whether the 2% acquisition fee is on purchase price or total capitalization, because on a heavy value-add those are very different numbers. @hannah_west29's math is right, and it moves by 20% depending on which base is used.

@wendy_park48's catch-up point is the one worth chasing first. Some decks show a promote that looks like 80/20 on the summary page, while the waterfall inside the agreement has a full GP catch-up that pays the sponsor 100% of distributions until they've caught up to their 20% of all profits including the pref. That single clause can move the LP outcome by a couple of points a year, and it never appears on the summary page.

Underwriting decides this one, so here is the unpopular part. Neither fee structure protects against a bad model. Fee-heavy structures show up on deals that work beautifully, and alignment-heavy structures show up on deals where the sponsor pushed rent growth to 5% a year in a market doing 2%, because the only way to reach their top return tier was to assume their way there. @ehernandez74, the swing-harder risk shows up in the assumptions long before it shows up in behavior. Ask for the rent comp set and the exit cap versus entry cap. If the exit is tighter than the entry, that's where the extra return is coming from.

I've done a lot of diligence on both shapes and I've landed on A more often, for a reason nobody likes. A sponsor with steady fee income survives a bad two years without doing anything desperate. A sponsor with no operating income during a downturn either raises a new deal to fund the last one or takes a rescue round on terms that flatten you. I'd rather pay $190k for institutional boredom than save it and find out who my sponsor becomes under pressure.

A common point of confusion worth clearing up: a pref doesn't mean an 8 percent return no matter what. Reading @wendy_park48's post, it accrues and gets paid before the split only if there's money to pay it. So it isn't a yield, it's a queue position.

@raj_mehta14, that's how I understand it too. Nothing gets paid if the building doesn't produce. The pref is just who stands first in line for whatever does get produced.

A for a reason specific to hold length. On a long hold the promote is a one-time event at the end and the fees are the recurring thing, so B's structure means twenty quarters of a sponsor who's mildly bored by the asset. On a three-year flip B is clearly better. @ehernandez74, how long are these two saying they'll hold?

The service side of this reads as a staffing question. A 2% of collected revenue asset management fee buys reporting, an asset manager who visits, someone who calls the property manager when collections slip. A 1% fee buys a spreadsheet updated when someone remembers. That's not universally true, but it's true often enough that a reasonable next question for either sponsor is how many people work there and who specifically handles this asset.

The version that holds up when nothing exciting happens is Sponsor A. @marcus_hale41 said it better than I would have.

For someone slow about decisions and stuck comparing two sponsors, the thing that would actually settle it is which sponsor answered the hard questions faster. @dpatel_re's exit cap test takes one email. A sponsor who sends the comp set within a day and a sponsor who takes three weeks and sends a marketing page have told an investor more than the waterfall did.

Looking at this from the operator side, B's structure is very attractive to a sponsor who's confident and already has cash in the bank, and it's dangerous for a sponsor who doesn't. If B is a two person shop living on that $18k a year, the next raise isn't optional for them and an investor becomes part of a treadmill. If B has a balance sheet and takes low fees because they can afford to, that's the best deal on the table. @ehernandez74, ask B how many deals they have running and what their overhead is. They won't love the question, and the reaction is the answer.