Sirmans, Sirmans & Turnbull (1999)

Citation: Sirmans, G. S., Sirmans, C. F., & Turnbull, G. K. (1999). “Prices, Incentives and Choice of Management Form.” Journal of Real Estate Finance and Economics.

Sirmans, Sirmans, and Turnbull examine how property owners choose between different property management arrangements and how fee structures shape manager behavior. The paper’s core idea is that management contracts embed incentives, and these incentives vary widely across the real‑estate industry.

The authors analyze the pricing and compensation structures used in property management and show that fees are not uniform. Instead, contracts often bundle multiple components, such as:

• A base management fee (often a percentage of collected rents)
• Leasing commissions or lease‑up bonuses
• Renewal fees
• Separate charges for maintenance, repairs, or special services

These components are designed to balance risk sharing and incentive provision. For instance, a rent‑based fee aligns managers with occupancy and collection, while leasing commissions encourage tenant acquisition but can also bias toward higher turnover if not carefully structured.

A major theme is contract heterogeneity: different property types, market conditions, and owner objectives lead to different management forms. Owners do not choose management structures randomly; they choose contracts that fit their tolerance for monitoring cost, their need for specialized expertise, and the degree to which they want to align manager behavior with performance outcomes.

The paper emphasizes that the management form itself can be seen as an economic choice. Owners weigh the benefits of outsourcing (specialized expertise, scale, operational efficiency) against the costs (weaker alignment, monitoring expenses). Incentive structures within contracts are a way to mitigate these costs without fully internalizing management.

While the paper is rooted in real‑estate management, its implications generalize to many service relationships. It highlights that incentive design is not one‑size‑fits‑all and that owners and managers negotiate compensation structures to balance risk, effort, and performance.

The study also points out that incentives can have unintended side effects. For example:

• Leasing commissions can encourage excessive tenant churn.
• Flat fees can reduce effort on revenue‑enhancing activities.
• Overly performance‑weighted fees can lead to short‑termism or gaming.

The authors view these outcomes not as evidence of “bad managers,” but as predictable consequences of contract design under imperfect observability. In their framework, contracts are the practical solution to agency problems: imperfect, but rational given constraints.

The contribution of the paper is to show that property management is a contracting problem, not merely an operational one. It documents the diversity of real‑world compensation structures and the economic logic behind them. It also provides empirical grounding for the idea that incentives vary substantially within a single role category, depending on how contracts are written.

Property management arrangements are chosen to balance costs and incentives. Compensation structures are heterogeneous, and contract design materially affects behavior and outcomes. The broader principle: “role” does not determine incentives—contracts do.