Percentage-of-Collections Fee Structures Leave Multifamily Owners Exposed to Unchecked Expense Growth

The standard third-party management fee model in multifamily properties pays managers a percentage of collected rent, typically 1.5% to 5% of gross revenue, according to Ron Kutas, CEO of OneWall Communities. This simplicity masks a misalignment between what managers are paid to do and what owners need them to do. Kutas says most management companies direct their time and energy toward marketing and leasing to maximize collections, resulting in an industry sophisticated at driving revenue while largely indifferent to expenses.

If a manager successfully reduces operating expenses—cutting vendor costs, improving maintenance efficiency, and renegotiating service contracts—net operating income rises and ownership benefits. But the manager’s fee stays flat because the fee is tied to revenue, not profitability. “If a management company doesn’t grow rents but spends all of their time on reducing expenses, the net operating income at the property will go up, which will satisfy ownership, but their fee stays flat,” Kutas says. The incentive to invest time in expense management does not exist within the current fee structure. Kutas frames this as structural rather than ethical; managers respond rationally to the incentives they face.

The most visible consequence is in service contract management. Landscaping, trash removal, cleaning, and snow removal contracts are typically renewed annually or seasonally. Without active oversight, vendors routinely increase rates by 2% to 5% per year, and managers on autopilot rarely push back. “Those numbers can be in the tens, if not hundreds of thousands of dollars annually,” Kutas says, describing what happens when service contracts go unreviewed across a portfolio.

Maintenance and repair present a related but distinct problem. When a technician lacks the training or supervision to diagnose an issue correctly, the easiest response is to call an outside vendor. Kutas offers the example of an HVAC unit: a technician who cannot diagnose the problem may recommend full replacement at $7,500 to $10,000, when the actual repair could have been completed for $500 to $750. Because the manager’s fee is unaffected by which option is chosen, there is no financial pressure to pursue the cheaper fix. “The justification for how money is spent on the expense side of things, especially as it relates to the maintenance of the property, is always a black hole,” Kutas says.

General and administrative expenses present yet another pattern. Kutas describes management companies that bill back corporate overhead, office furniture, support staff, and administrative costs to individual properties on a pro-rated basis. Each charge may be small, but they accumulate across months and properties without owners recognizing the pattern.

For owners who rely on monthly reports to monitor performance, the problem is compounded by reporting frameworks built around revenue metrics—occupancy, rent growth, lease trade-outs—rather than expense justification. Kutas says revenue data was always accessible when he was on the ownership side, but expense justification was not. Owners can see that a specific dollar amount was spent on HVAC repairs in a given month. They typically cannot see whether those repairs were necessary, whether alternatives were explored, or whether a vendor was called when an in-house technician could have handled the work. For investors underwriting acquisitions based on projected net operating income, that invisible expense layer can meaningfully erode actual returns.

OneWall Communities, which operates as both an owner and a third-party manager of multifamily properties, builds its budget review process around regional cost-per-unit benchmarks, then moves to a line-by-line review of every expense category, including what is handled in-house versus by outside vendors and whether that balance reflects operational need or the absence of trained staff. “We do keep all of our vendors honest in terms of service contracts, and we do shop those around across our portfolio every single year,” Kutas says. The firm also requires that all billback items be explicitly listed as an exhibit to every property management agreement, so owners know in advance exactly what they will be charged for.

Kutas says the single most revealing question in any budget review is simple: who is the top vendor paid this month, and why? He describes a 450-unit property where the answer revealed an HVAC contractor billing for roughly 100 service calls in a single month, nearly 25% of the units. Investigation showed that an abnormally hot three-day stretch had triggered resident complaints, and untrained staff called a vendor for each one at $180 per visit rather than explaining that the weather exceeded the system’s capacity.

OneWall’s approach represents one model for building expense accountability into management operations. The limitation is that it requires trained on-site staff, detailed benchmarking data, and a willingness to invest management 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.