Tariffs and pricing control: why GPs control less than you think

Welcome back and happy Friday!

LPs often assume that GPs control financial decisions within a syndication. To some extent, this is obviously true - they’re the owners of the building and are fully in charge of executing on the business plan!

Are GPs price setters or price takers, and how does that change with different components of NOI?

Today I’d like to explore this at length, while also pointing out some points of stress for real estate investors as a result of the recent tariff announcements.

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First let’s define Price Setters vs Price Takers:

• Price Setter: Someone who gets to “set” the price of a product or service

• Example: A company with a unique product that no one else has - like a luxury brand - can choose to charge ~any price as long as they’re fine with demand implications

• Price Taker: Someone who’s forced to “take” the market price and can’t really influence it

• Example: A farmer selling wheat usually has to sell it at whatever the current market price is, because there are many other farmers selling the same thing

Now, let’s see how this impacts a typical multifamily P&L:

• Rental Income

• Price Taker: Rent rates are largely set by local market comparables and market conditions. GPs have limited ability to set rents above competitive levels without risking higher vacancies

• Note that this one’s tricky! It’s true that a GP can set rents to (in most cases) whatever they want… but nobody in their right mind would keep a building vacant just to show high asking rents!

• This is also why rental comps are extremely important - you’re subject to that market today, and you will be subject to the same market (whether that’s good or bad) in the future

• Counterexample (Price Setter): Having said the above, GPs might have the ability to achieve premium pricing through value-add renovations or implementing unique amenities and services not offered by competitors

• This essentially​ helps them set the property apart from other options, thereby giving more leverage to the GP to set pricing

• Having said that, differentiating yourself (even after renovations) isn’t easy, as I talked about at length here

• Property Taxes

• Price Taker: Local governments determine property tax assessments and rates. GPs must typically accept these assessments without significant leverage

• Be sure to look out for these assumptions in decks, since property tax bills can change significantly as a result of a sale!

• Counterexample (Price Setter): GPs can challenge assessments through formal appeals or negotiations, sometimes successfully reducing tax liability

• Insurance Costs

• Price Taker: Insurance premiums depend heavily on market conditions, property location (+ age!), and broader risk environments, offering GPs little direct pricing control

• Counterexample (Price Setter): GPs might opt to either self-insurance or (if large enough) use captive insurance. This gives more control, but typically also comes with more risk (to both GP and LPs)

• Impact of Recent Tariffs: If tariffs increase the cost of building materials, this will naturally lead to higher replacement costs for properties. As a result, insurance companies may raise premiums to account for higher potential payouts in the event of claims

• Utilities / Repairs

• Price Taker: Rates for electricity, water, and gas are set by utility providers and regulated agencies … the same is true for repairs in most cases - it’s close to a commoditized good with respect to price

• Counterexample (Price Setter):

• GPs can implement cost-saving initiatives, such as installing energy-efficient appliances or negotiating bulk utility purchase agreements to reduce overall utility expenses.

• GPs can also shop around on repairs or bring some of that talent in-house (if they’re large enough to make sense of it)

• **Impact of Recent Tariffs: **Repairs are likely to increase in price to the extent that goods were manufactured abroad (many are - e.g. HVAC units)

• Payroll Expenses

• Price Taker: Market conditions and local employment standards typically dictate employee wages and benefits, constraining GP flexibility

• Counterexample (Price Setter): GPs could stay more competitive by offering other perks, to essentially set themselves apart from the competition. However, whether they’re doing property management themselves or outsourcing this - again - is a fairly “price taker” territory

Overall, I think you’ll notice an interesting balance - while owning the building and fully controlling all management decisions, a GP actually is a price taker on many aspects of a P&L.

The largest thing that they control is income, but even that is subject to competition to the extent that the building is similar to others in the area.

While I still have you, let’s make another thing very clear - with the exception of very few cases, GPs cannot control (i.e. they’re price takers) when it comes to cap rate at disposition. This is why I encourage sensitivity tables (examples here) and conservative assumptions.

As always, I look forward to your feedback and comments!

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