Fee Model Misalignment: Managers Reward Revenue, Not Cost Control

The standard third-party management fee model in multifamily real estate rewards revenue growth but not cost discipline, leaving property owners vulnerable to expense creep that compounds across every line item. According to Ron Kutas, CEO of OneWall Communities, the dominant compensation structure pays managers a percentage of collected rent—typically 1.5% to 5% of gross revenue. This seemingly simple model masks a fundamental misalignment: managers are incentivized to maximize revenue through marketing and leasing, while expenses are largely ignored. Kutas argues that if a manager successfully reduces operating costs—by cutting vendor expenses, improving maintenance efficiency, or renegotiating service contracts—net operating income rises for the owner, but the manager's fee remains flat because it is tied to revenue, not profitability. This structural misalignment leads to rational but costly behavior: managers focus on what they are paid to do, leaving expense oversight as an afterthought.

The consequences accumulate across multiple expense categories. Service contracts for landscaping, trash removal, cleaning, and snow removal are often renewed annually without active oversight, allowing vendors to routinely increase rates by 2% to 5% per year. Kutas notes that these unchecked increases can amount to tens or hundreds of thousands of dollars annually across a portfolio. Maintenance and repair costs present a related challenge: when on-site technicians lack training, the easiest response is to call an outside vendor, even for minor issues. Kutas cites an example where an HVAC unit could have been repaired for $500 to $750, but instead was replaced for $7,500 to $10,000 because the manager had no financial incentive to pursue the cheaper option. General and administrative expenses, such as corporate overhead and office furniture billed back to properties on a pro-rated basis, further erode returns without owners recognizing the pattern.

For owners relying on standard monthly reports, the problem is compounded by reporting frameworks built around revenue metrics—occupancy, rent growth, lease trade-outs—rather than expense justification. Kutas explains that while revenue data is readily accessible, expense justification is not. Owners can see how much was spent on HVAC repairs in a given month, but not whether those repairs were necessary or if alternatives were explored. OneWall Communities addresses this by building its budget review process around regional cost-per-unit benchmarks and conducting line-by-line reviews of every expense category. The firm also requires that all billback items be explicitly listed as an exhibit to every property management agreement, ensuring owners know in advance what they will be charged. Kutas emphasizes that the single most revealing question in any budget review is: who is the top vendor paid this month, and why? This approach, while effective, requires trained on-site staff, detailed benchmarking data, and a willingness to invest time in work that generates no additional fee income under standard contracts. For owners evaluating third-party managers, the practical question is whether their current manager has any financial reason to do this work, and if not, what reporting or contract terms would create one.