Ask a well advised investor what troubles them about a firm that arranges the financing of an asset and then manages that same asset, and the answer comes back quickly. The concern is rarely competence. It is alignment: who is paid for what, on what event, and who is expected to say so when the plan stops working. The question is legitimate and it deserves something better than reassurance. The honest position is that the two roles do belong together in most direct real estate mandates, that combining them creates a specific and identifiable conflict, and that the conflict is governed by structure rather than dissolved by good intentions.
Where the two roles genuinely reinforce each other
The case for integration is not theoretical. A credit file is, in substance, a business plan translated into the language of a lending committee. Whoever built the plan knows which assumptions are load bearing, which tenants are the actual covenant, which capital expenditure is deferrable and which is not, and where the operating downside sits. That knowledge produces a cleaner submission, fewer rounds of clarification, and a lender who underwrites the asset accurately rather than defensively.
The reinforcement runs in the other direction too, and this is the part that is usually undervalued. Financial covenants are not documentation to be filed once the facility draws. They are operating constraints. A loan to value test, an interest cover ratio, a cash sweep trigger or a permitted disposals clause each impose a discipline on leasing decisions, on the timing of works, on distribution policy and on exit sequencing. A manager who negotiated those terms understands why they sit where they sit and what headroom actually exists. A manager who inherits them often discovers the constraint at the moment it binds. Structuring and stewardship are two views of one decision, which is why the financing workstream and the operating mandate are so often run by the same team.
Where the interests diverge
Now the uncomfortable part. The interest in closing a financing is not identical to the interest in obtaining the best available financing. Anyone who has run a process knows the pull. A transaction has a deadline. One lender already knows the sponsor, has done the site visit, and will move quickly. Another might offer better economics or looser covenants but requires an additional credit committee and a second valuation. If the arranger’s remuneration is contingent on completion, the incentive tilts towards the deliverable outcome rather than the optimal one. That tilt is rarely conscious and almost never dishonest. It is structural, which is precisely why it must be addressed structurally.
The divergence extends beyond lender selection. Leverage itself is a variable with two audiences. Higher gearing sharpens the equity return profile and, where fees are calculated on gross asset value or on transaction volume, can raise the adviser’s remuneration. It also increases fragility, refinancing exposure and sensitivity to rate movements. The right level of debt for an asset is a function of cash flow durability, hold horizon and the investor’s own tolerance, not of the fee it generates. The limits on interest deductibility under the ATAD regime add a further layer, since the after tax cost of debt is no longer a simple function of margin.
The reporting problem, which is the sharpest of the three
The most serious conflict is not lender selection or leverage. It is reporting. In an integrated mandate, the party that arranged the debt is frequently the party that manages the asset, and therefore the party that prepares the compliance certificates confirming that the covenants on that debt are being met.
Consider what that means when performance drifts. A valuation moves against the position, occupancy softens, or a capital expenditure programme overruns. The manager sees it first. The manager also has a professional interest in the financing having been well structured, and an institutional interest in not reporting a breach on a facility they themselves arranged. Nothing improper need occur for the outcome to be poor. A test measured on a slightly generous basis; a valuation instruction timed conveniently; a covenant reset negotiated quietly with the lender and disclosed to the investor afterwards. Each step is defensible in isolation and the aggregate is an investor who learns late.
A conflict that is disclosed, priced and constrained is a manageable feature of an integrated mandate. A conflict that is denied is simply a conflict nobody is monitoring.
Remuneration disclosed before the mandate, not after
The first control is complete transparency on how each role is paid, set out before the mandate is signed and in a single document rather than scattered across engagement letters. The relevant disclosure is mechanical, not numerical. Investors need the basis of each fee, the event that triggers it, and whether it moves with any variable the same firm influences.
In practice that means stating whether the arranging fee is fixed or a percentage of facility size; whether it is payable on completion only, or partly on mandate; whether any part of it is received from the lender rather than the borrower, and if so on what basis. On the management side it means stating whether the fee is calculated on invested equity, on gross asset value or on collected income, because the choice determines whether leverage increases the fee. It means describing any performance element, the threshold above which it accrues, whether that threshold is measured across the portfolio or asset by asset, and when it crystallises. Where the same firm receives income from more than one leg of a transaction, the correct treatment is to disclose it and, in many mandates, to credit it against the management fee. Fee structures are a governance matter as much as a commercial one, which is why they belong alongside the wider governance design of the holding structure rather than in a separate commercial annex.
The financing decision belongs to the investor
The second control is a hard allocation of authority. The adviser runs the process, approaches the market, negotiates terms and forms a recommendation. The investor selects the lender. That division only works if the investor sees what the adviser saw, which means the comparison is presented on identical terms across candidates and includes the offers not recommended.
A usable comparison sets out, for each proposal, the all in cost including arrangement and non utilisation fees, the covenant package with its actual headroom against the base case, the amortisation profile, prepayment economics, security and guarantee requirements, any cash trap mechanics, and the reporting burden imposed on the manager. It should also record which lenders declined and why, because rejections carry information about how the market reads the asset. Where the adviser has an existing relationship with a proposed lender, referral arrangements included, that belongs in the comparison rather than in a footnote. The investor may well accept the recommendation. What matters is that acceptance is an exercise of choice rather than the absence of one.
Separating the reporting line
The third control addresses the reporting conflict directly, and it is the one most often skipped. Covenant compliance reporting should not be prepared and approved by the same people who arranged the facility and manage the asset day to day.
Separation can be achieved in several ways depending on the scale of the mandate. Compliance calculations can be prepared by an independent administrator working to a defined methodology. Valuations underpinning loan to value tests can be instructed on a fixed cycle by the investor or by an independent board member, rather than commissioned by the manager at a chosen moment. Where a structure includes an independent director, or where assets sit under a stichting arrangement, that party can be given the specific function of receiving covenant reporting and escalating it without management filtering. Above all, the reporting protocol should define what triggers immediate notification to the investor, expressed as measurable headroom thresholds, and require that any approach to a lender regarding a waiver, reset or amendment is notified to the investor before the conversation rather than after it concludes.
Declared and structured
None of this eliminates the conflict, and firms that claim otherwise should be read carefully. The interests of an integrated adviser and those of an investor overlap substantially and diverge at identifiable points. The professional response is to name those points in advance, disclose the economics attached to each, give the investor the decision rights that matter, and separate the function that reports on performance from the function that produced it. Where any element of a mandate touches a regulated activity, it is carried out by appropriately licensed parties rather than by the operating adviser.
An investor evaluating an integrated mandate can test all of this before signing anything. Ask how each leg is remunerated and what happens to the fee if leverage rises. Ask who prepares the compliance certificate, who instructs the valuation and on what cycle. Ask to see the financing proposals that were not recommended. A firm that has structured the conflict answers each of those in a paragraph. A firm that has not will answer with a description of its culture.
Montclare works as an operating partner and structuring counterparty on European real estate and asset platforms. Our approach is set out on our asset management page.
This article is informational. It does not constitute investment advice, an offer, or an invitation to invest, and it is not a financial promotion. Regulated activities are carried out only by appropriately licensed parties.