Almost every mandate letter in European real estate uses the phrase “operating partner”, and very few define it. The term travels well because it flatters both sides: closer to the asset than an adviser, more accountable than a consultant, less remote than a fund manager. What it rarely conveys is the substance of the arrangement, which is the transfer of executional responsibility from the owner of the capital to a party judged on whether the business plan actually happens. That transfer is the point of the appointment, and it is where most later disagreements begin.
Advice stops at the recommendation
The cleanest way to understand an operating-partner mandate is by what it is not. An adviser produces analysis, options and a recommendation; the client then decides and, crucially, the client then executes. The adviser’s obligation is discharged once the advice is delivered and competent. Responsibility for the outcome does not move.
An operating partner takes the next step. It accepts a mandate to deliver a defined business plan for a defined asset or portfolio, with authority to act within agreed limits and an obligation to report against a plan it has itself signed up to. The distinction is not one of expertise but of accountability. When a letting is not achieved, when a refurbishment overruns, when a property manager underperforms, the adviser explains and the operating partner answers.
The difference shows up in drafting. Advisory engagements are written around scope and standard of care; operating mandates are written around authority, budget, reserved matters, information rights and termination, which is why they read less like a services contract than like a management agreement.
The business plan is the governing document
Every serious mandate begins with an agreed business plan, and the quality of that document determines almost everything that follows. It sets out what the asset is expected to become: the intended tenant mix or use, the works required, the target lease profile, the financing structure, the disposal strategy and the sequence in which those elements occur. It should also state the assumptions on which it rests, because those assumptions are what will be tested.
The plan does double duty. Forward-looking, it is the instruction set; backward-looking, it is the yardstick. Variance against plan is the language in which the relationship is conducted, which is why plans written in aspirational prose cause so much trouble. A plan that cannot generate a variance report is not a plan.
Mandates should also say how the plan is refreshed: annual re-approval is common, with interim revision when a material assumption fails. A plan quietly abandoned but never formally replaced leaves the operating partner working to a document nobody believes and the investor measuring performance against a fiction.
Budgets: capital and operating
Two budgets sit beneath the plan and they behave differently. The operating budget covers the recurring running of the asset: service charge and non-recoverable costs, insurance, property management, letting and marketing, professional fees, local compliance. It is approved annually and administered within tolerance thresholds on individual line items and on the budget as a whole, above which consent is required.
The capital budget covers works, fit-out contributions and anything else that changes the asset rather than maintaining it. It is normally handled project by project, with approval sought against a defined scope, a cost plan, a programme and a contingency. The mechanics that matter are the thresholds, who may authorise variations, how contingency is released and what happens when a project heads beyond its envelope. The failure mode is familiar: a series of individually reasonable variations that in aggregate consume the value the works were meant to create.
Managers, leasing and works
An operating partner rarely does the work itself. Its function is to select, instruct and supervise the parties that do: property managers, letting agents, contractors, project managers, local accountants, tax agents and counsel. The mandate should say who appoints them, who holds the contract and whether their fees sit inside the operating budget or are charged separately. Where an activity is regulated, it is performed by appropriately licensed parties instructed for that purpose, not by the operating team.
Supervision is the part investors underestimate. Selecting a competent local manager is a discrete exercise; holding that manager to a standard across years and through staff turnover is a continuing one. The operating partner should review provider performance on a stated cadence and should be able to replace an underperformer without a governance battle each time.
On leasing, the mandate must state the parameters within which terms may be agreed: minimum rent, maximum incentive, permitted lease length and break structure, covenant criteria, and use restrictions. Deals inside the parameters proceed; deals outside them go up. Without such a grid, either every letter of intent becomes a board matter or the investor learns the terms after signature. On works, the equivalent grid covers scope, contract form and procurement route.
Lenders and reporting
Where the structure is financed, the operating partner usually carries the day-to-day lender relationship: covenant testing and certification, drawdown requests, information undertakings, consents for lettings or works that require them, and the early warning conversations that determine whether a covenant issue is managed or merely discovered. Loan documentation is unforgiving about deadlines that operational teams treat as approximate. How the business plan sits against the debt package deserves attention before signature rather than after, as our note on financing alongside an asset mandate sets out.
Reporting is the visible product of the mandate. A workable pack combines a short narrative, variance against both budgets, a rent roll and arrears position, a leasing pipeline, a works programme, covenant headroom and a forward cash view. Calendar, format and escalation triggers belong in the mandate itself; reporting negotiated after appointment settles at whatever the operating partner finds convenient.
Reserved matters: where the operating partner stops
Authority is defined by its limits, and the reserved matters schedule is where an investor states what it will not delegate. The usual list covers acquisition and disposal of assets, incurring or refinancing debt and granting security, approval of the business plan and annual budgets, capital expenditure above a threshold, leases outside the agreed parameters, litigation, related-party contracts, changes to the entity structure, distributions, and the appointment or removal of directors and auditors.
Two drafting points repay attention. First, reserved matters should be paired with a decision protocol: who is asked, in what form, within what period, and what follows if no answer arrives. A veto with no response deadline is a licence to stall. Second, the schedule should be read against the governance of the holding entities themselves, since board authority and shareholder consent operate together rather than in parallel, as our piece on governance design in Dutch holding companies sets out.
An operating partner who cannot be overruled is not a partner. An operating partner who can be overruled on everything is a consultant on a longer retainer.
How remuneration is built
Fee mechanics matter more than fee levels. Remuneration in these mandates is assembled from a small number of components, and the negotiation is about which apply and how each is measured.
- A base fee, calculated on invested equity, on committed capital, on gross asset value or on collected rent. Each base produces different incentives: a fee on gross asset value rewards leverage and revaluation; a fee on collected rent rewards occupancy; a fee on equity is the most neutral and the least responsive to activity.
- Transaction and project fees, for acquisition, disposal, financing or the management of works. These reward activity rather than outcome, so the questions are whether they are additional to the base fee or credited against it, and what is payable when a transaction is abandoned.
- A performance element, paid out of proceeds above an agreed threshold once capital has been returned. The variables are the definition of the hurdle, whether the calculation runs asset by asset or across the whole portfolio, whether it is settled only on realisation or on interim valuations, and whether early payments can be clawed back.
An illustration, deliberately round and plainly hypothetical: where the threshold is measured asset by asset, an operator holding two assets, one of which doubles in value while the other halves, may earn a performance fee on the first while the investor is flat overall. Portfolio-level measurement removes that outcome. The measurement basis, not the headline percentage, decides who carries what.
Who decides to sell, and on what majority
This is the question to settle before signature, and the one most often deferred. A mandate can run competently for years and still fail at the exit, because the parties never agreed who may initiate a sale, who may block one, and what follows when they disagree.
Who may propose a disposal, and is the operating partner obliged to run a process when instructed? What majority approves a sale, and is it measured by capital or by class? Is there a lock-up, and a longstop after which any holder may force a sale? How is price tested: an agreed valuation mechanism, an open marketing process, or a right of first offer to the other side? And if the parties deadlock, which mechanism applies, whether a buy-sell arrangement, a put and call at an independently determined value, or a forced marketing of the whole.
These provisions interact with the ownership vehicle, since the ability to enforce an exit depends on where title and control actually sit, as our note on separating control and ownership in Dutch structures discusses. The point is not that one answer is correct. It is that a mandate with a fully specified budget process and an unspecified exit process is built for the easy years and untested in the difficult one.
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.