What Is a Management Fee in CRE Underwriting?

Typical Management Fee Ranges by Asset Class

Management fee percentages vary significantly by property type. Larger properties and portfolios typically command lower rates because the absolute dollar amount is higher.

Benchmarks from NAA expense surveys and IREM income/expense analysis.

Lender-Required Minimums

Lenders require a minimum management fee in their underwriting regardless of whether the property is self-managed. This protects the lender's interest because if the borrower defaults, a receiver or new owner will need to hire professional management at market rates.

Agency lenders (Fannie Mae, Freddie Mac) typically require 5% to 6% for multifamily properties. CMBS lenders apply similar floors. Some lenders allow a lower fee for very large assets (500+ units) if the borrower can demonstrate a track record of institutional-quality management.

This means that a self-managed property showing 0% management fee on the trailing financials will be underwritten with a 5% to 6% fee by the lender, directly reducing the NOI used to size the loan. Buyers must account for this gap when analyzing self-managed acquisitions.

Self-Managed vs Third-Party Management

Self-managed properties are operated directly by the owner or ownership entity. The owner handles leasing, maintenance, accounting, and tenant relations internally. This can reduce the explicit management fee expense but does not eliminate the cost, it just shifts it to payroll and overhead.

Third-party management involves hiring a professional property management company. The fee is explicitly stated in the management agreement and typically calculated as a percentage of collected revenue, sometimes with a minimum monthly amount.

When to underwrite third-party management

• When acquiring a self-managed property (the seller's cost structure will not transfer)
• When presenting to institutional investors or lenders (they assume professional management)
• When the buyer does not have an in-house management platform
• When comparing the property to third-party-managed comps

Always underwrite a market-rate management fee even if you plan to self-manage. This provides an apples-to-apples comparison and ensures the deal works if you eventually transition to third-party management.

What the Management Fee Covers

The base management fee typically covers day-to-day operations. However, many management agreements include additional fees for specific services that are charged separately.

• Included in base fee: rent collection, tenant communications, vendor coordination, monthly reporting, budget preparation, regulatory compliance
• Often charged separately: leasing commissions (typically one month's rent per new lease), construction/renovation oversight (3% to 5% of project cost), eviction processing, insurance claims management

Review the management agreement carefully during due diligence. The base fee percentage alone does not capture the full cost of management, and hidden fees can add 1% to 2% to the effective rate.

Impact on Property Valuation

Because the management fee directly reduces NOI, it has a leveraged effect on property value. At a 5.5% cap rate, every $1 of additional management fee reduces property value by approximately $18.18.

This is why sellers of self-managed properties often show inflated NOI. The 0% management fee on their T12 flatters performance, but no buyer should underwrite without a market-rate fee.

Negotiating Management Fees

Management fees are negotiable, especially for larger properties and portfolios. Several strategies can reduce the effective cost of management without sacrificing service quality.

• Portfolio pricing. Offering a management company multiple properties creates leverage. A 50-basis-point reduction across a 500-unit portfolio saves $25,000 or more per year.
• Performance-based structures. Some managers accept a lower base fee (3% instead of 4%) in exchange for a performance bonus tied to occupancy or NOI thresholds. This aligns incentives.
• Fee caps on ancillary charges. Negotiate caps on leasing commissions, construction oversight fees, and other add-on charges that can inflate the effective rate.
• Competitive bidding. Solicit proposals from three to five management companies during due diligence. The competitive process itself produces better pricing and clearer service level agreements.

Do not over-optimize on management fee. A 50-basis-point savings is meaningless if the cheaper manager under-performs on occupancy, collections, or maintenance responsiveness. The goal is value, not the lowest percentage.

Common Management Fee Underwriting Mistakes

Several errors frequently appear in management fee underwriting, particularly when analysts rely on the seller's financials without adjustment.

• Using the seller's 0% fee for a self-managed property. The buyer's cost structure will differ. Always underwrite at market rate.
• Applying the fee to GPR instead of EGI. Management fees are typically calculated on collected revenue (EGI), not gross potential rent. Using GPR overstates the expense.
• Ignoring ancillary management charges. Leasing commissions, construction oversight, and other add-on fees can increase the effective management cost by 1% to 2% above the base fee.
• Not inflating the fee over the hold period. If the fee is a percentage of revenue, it automatically grows with rent increases. If it is a flat dollar amount (common for small properties), it should be inflated annually.

Management Fee Due Diligence Checklist

When underwriting a management fee for an acquisition, verify these items during due diligence.

1. Review the current management agreement for fee structure, term, and termination provisions.
2. Identify all ancillary fees beyond the base management percentage.
3. Compare the current fee to market rates for similar properties in the submarket.
4. Determine whether the seller self-manages and what the true cost of management is.
5. Confirm the lender's minimum management fee requirement for loan underwriting.
6. Evaluate whether the existing manager will be retained or replaced post-acquisition.

Completing this checklist during due diligence prevents surprises that can erode returns. A 1% management fee discrepancy on a $2,000,000 EGI property equals $20,000 per year, or roughly $333,000 to $400,000 in property value at a 5% to 6% cap rate.

Technology's Impact on Management Costs

Property management technology platforms (Yardi, RealPage, AppFolio, Entrata) have reduced the labor intensity of management tasks. Online leasing, automated work order systems, and virtual tours allow management companies to operate more efficiently.

Some management companies now offer "tech-enabled" models with lower base fees in exchange for technology surcharges. When comparing management proposals, evaluate the total cost including technology fees, not just the headline management percentage.

For asset management reporting, tools like Primer can automate the extraction of financial data from property management reports, reducing the time owners spend reviewing monthly financials and freeing management staff for higher-value tasks.

Where the Management Fee Sits in the Income Waterfall

In a standard pro forma, the management fee is one of several operating expenses deducted from Effective Gross Income to arrive at NOI.

1. Gross Potential Rent
2. Minus: Vacancy, concessions, bad debt
3. Plus: Other income
4. Equals: Effective Gross Income
5. Minus: Operating expenses (including management fee)
6. Equals: Net Operating Income
7. Minus: Replacement reserves
8. Equals: NOI after reserves