How Should a Sponsor Present Related-Party Contracts To a Family Office During Real Estate Investment Diligence?

Related-party contracts can stall family office diligence when affiliated fees, pricing, or approval processes are not fully disclosed and supported by market evidence. The solution is to present every affiliated agreement upfront, show the ownership relationship and economics, benchmark each term against unaffiliated alternatives, and document the governance approval process. That allows a family office to confirm the arrangement is arm's length before it questions whether GP affiliates are extracting value from LP returns.

Family offices reviewing a real estate sponsor's deal package flag related-party contracts as a primary diligence concern because affiliated arrangements create potential conflicts of interest that can distort project economics and erode LP returns. The five contract types that draw the most scrutiny are: property management agreements with a GP-affiliated manager, construction or general contracting agreements with a sponsor-owned GC, leasing and brokerage agreements with affiliated brokers, shared-services or overhead reimbursement agreements, and loan guarantees or credit facilities extended by the GP to the project entity. Each of these must be disclosed in full, with pricing benchmarked against unaffiliated market comparables, before a family office will advance past the first diligence call.

The standard family offices apply is the arm's-length test: would an independent third party have agreed to the same terms under the same conditions? When the answer is unclear or undocumented, diligence stalls. Sponsors who present their funding needs to family offices with affiliated arrangements already benchmarked and disclosed move through review faster than those who surface these arrangements reactively.

This guide covers which related-party contracts draw the most scrutiny, what disclosure language family offices expect, how the arm's-length evaluation works in practice, and what belongs in the data room before the first conversation begins.

Which Related-Party Contracts Family Offices Flag First

Family offices prioritize contract reviews based on dollar magnitude and the degree to which an arrangement can redirect value from the LP to the GP.

Property Management Agreements

GP-affiliated property management is the most common related-party arrangement in real estate deals and the first one a family office legal or diligence team will pull. The concern is straightforward: a management fee paid to an affiliate reduces distributable cash flow and the sponsor controls both sides of the negotiation. Family offices expect the fee to fall within the market range for the asset class and geography, and they expect to see at least two unaffiliated bids or a third-party market study confirming the rate is competitive.

Key disclosure requirement: The agreement must name the affiliated entity, state the ownership relationship between that entity and the GP, and include the fee rate, the basis (gross revenues or effective gross income), and the term.

Construction and GC Agreements

Affiliated general contracting represents a high-risk related-party arrangement from a family office perspective because construction budgets are large, cost overruns are common, and a GP-controlled GC can shift profit from the project to the affiliate through change orders or inflated line items. Family offices compare the affiliated GC's contract price to third-party bids. Documenting a competitive bid process is essential to passing this stage of diligence.

Key disclosure requirement: Disclose the GC's ownership structure, the contract type (fixed-price, cost-plus, or GMP), the total contract value, the change order approval process, and any profit participation the GC holds in the project entity.

Leasing and Brokerage Agreements

Affiliated leasing brokers or sales agents raise a narrower but still material concern: the commission structure may incentivize faster lease-up at below-market rents, or faster sales at below-market prices, to generate fee income for the affiliate. Family offices review commission rates against market comparables and look for whether the agreement contains any performance benchmarks tied to net effective rent or sale price per square foot.

Shared-Services and Overhead Reimbursement Agreements

Overhead allocations and shared-services charges are the most opaque related-party arrangements and the ones most likely to create friction in diligence. A sponsor that charges the project entity for accounting, legal, IT, or office space through an affiliated management company must be able to show that the allocation methodology is documented, consistent across projects, and proportional to actual use. Undocumented reimbursements that appear to shift GP overhead costs onto LP capital are a common reason family offices request additional information before proceeding.

For a broader view of how family offices evaluate the full GP economics picture, the asset management fees guide covers how fee lines aggregate into a total economics test.

How Family Offices Test Whether an Arrangement Is Arm's Length

The arm's-length standard requires that the terms of an affiliated contract are consistent with what two unrelated, informed parties would have agreed to in an open market. Family offices apply this standard through a four-part evaluation.

The Four-Part Arm's-Length Test

Sponsors who can produce documentation for all four steps move through diligence with minimal friction. Sponsors who can only address pricing but have no process documentation or governance approval record face follow-up questions that slow the timeline.

What Triggers a Red Flag

Family offices are experienced enough to distinguish between a defensible affiliated arrangement and one that appears designed to extract value. The patterns that trigger additional scrutiny include:

• Affiliated contracts signed before the LP relationship was established, with no disclosure in the PPM or operating agreement
• Fee rates that exceed the top of the market range without a documented justification
• Change order authority that allows the affiliated GC to increase contract value without LP notification
• Overhead reimbursements that are not capped or that increase as a percentage of project costs
• Any arrangement where the affiliated party has a profit participation in the project entity in addition to a fee

The core principle: Establishing full disclosure and meeting the arm's-length standard are both required. A family office wants to confirm that the sponsor maintained a formal process for evaluating the arrangement, that terms are defensible against market comparables, and that LPs retain a mechanism to verify ongoing compliance.

The PPM and data room guide covers how related-party disclosures fit into the broader offering document structure and what belongs in each location.

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What the Data Room Must Include Before the First Diligence Call

Sponsors who wait for a family office to ask about affiliated arrangements before disclosing them create an immediate credibility problem. The standard expectation is that all related-party contracts are in the data room on day one, organized so a diligence reviewer can locate and evaluate them without a follow-up request.

Required Data Room Materials for Related-Party Contracts

• Executed contracts for every affiliated arrangement, including all amendments and change orders
• Ownership chart showing the relationship between the GP entity, the sponsor's principals, and each affiliated service provider
• Market comparables supporting the pricing in each affiliated contract: at minimum two unaffiliated bids or a third-party market study
• Disclosure schedule cross-referencing each affiliated arrangement to the relevant section of the PPM or operating agreement where it is disclosed
• Governance approval record showing LP advisory committee consent or independent approval for each arrangement, if required under the operating agreement
• Conflict of interest policy from the sponsor's operating documents, showing how affiliated transactions are evaluated and approved

The Disclosure Language Standard

The SEC guidance on related-party transaction disclosure for private offerings requires that material affiliated arrangements disclose: the nature of the relationship, the dollar amount of the transaction, any ongoing financial interest the affiliate holds, and how the transaction was approved. Family offices apply the same standard even for deals that do not require SEC registration. Disclosure language that omits any of these four elements is treated as incomplete.

Sponsors preparing for raises in the $5M to $250M range should expect family offices to spend meaningful time on this section of the data room. A clean, well-organized related-party disclosure package signals that the sponsor operates at an institutional standard and understands what the LP needs to complete their fiduciary review.

For context on how related-party disclosures interact with the broader diligence document set, the 47 due diligence documents guide covers the full data room structure across all seven diligence tracks.

Sponsors who want support structuring their related-party disclosures and positioning their GP economics for institutional review can learn how IRC works with real estate sponsors raising institutional capital at this stage.

Frequently Asked Questions

What is the arm's-length standard for related-party contracts in a real estate LP deal?

The arm's-length standard requires that the pricing, terms, and conditions of an affiliated contract are consistent with what two unrelated parties would have agreed to in an open market. For real estate LP deals, family offices test this by comparing the affiliated contract rate to at least two unaffiliated bids or a published market range, reviewing whether the sponsor documented a selection process, and confirming that the arrangement was disclosed and approved through the governance procedures in the operating agreement.

Which related-party contracts draw the most scrutiny from family offices during real estate diligence?

Construction and GC agreements draw the most scrutiny because the dollar amounts are the largest and the potential for cost inflation through change orders is highest. Property management agreements with GP-affiliated managers are reviewed in every deal. Shared-services and overhead reimbursement agreements draw scrutiny because the allocation methodology is often undocumented. Leasing and brokerage agreements with affiliated brokers are reviewed for commission rates and any incentive structures that could favor speed over pricing.

Does a sponsor have to disclose a related-party contract if it was signed before LP capital was raised?

Yes. Pre-existing affiliated arrangements require full disclosure in the PPM or operating agreement before LP capital is accepted. Family offices evaluate pre-existing arrangements carefully, as complete transparency is required across all historical and active agreements. Disclosure must cover the nature of the relationship, the dollar amount, the term, and how the arrangement was approved.

What documentation does a family office expect for an affiliated GC contract?

A family office reviewing an affiliated GC contract expects to see: the executed contract including all amendments, the GC's ownership structure and its relationship to the GP principals, the contract type (fixed-price, cost-plus, or GMP), the total contract value, the change order approval process, any third-party bids that were solicited, and a market pricing comparison. If the GC also holds a profit participation in the project entity, that interest must be disclosed separately and its dilutive effect on LP returns must be modeled.

Can a sponsor use an affiliated property manager if the fee is at market rate?

An affiliated property manager is acceptable to most family offices if the fee is within the market range for the asset class and geography, the relationship is fully disclosed in the PPM and operating agreement, and the sponsor can produce at least two unaffiliated bids or a third-party market study confirming the rate. Some family offices also require that the operating agreement include a provision allowing the LP advisory committee to replace the affiliated manager if performance benchmarks are missed.

How should overhead reimbursements to a GP affiliate be structured to pass family office review?

Overhead reimbursements pass family office review when they are documented in the operating agreement with a defined allocation methodology, capped as a fixed dollar amount or a percentage of project costs, and consistent across all projects the sponsor manages. Reimbursements that are uncapped, that increase as the project grows, or that are charged without a written allocation policy are treated as potential value extraction and trigger additional information requests. Sponsors raising capital in the $5M to $250M range should document the reimbursement methodology before the first diligence call.

What happens if a family office finds an undisclosed related-party contract during diligence?

An undisclosed related-party contract found during diligence typically pauses the process while the family office reassesses the sponsor's operational practices. In most cases, the family office requests a full accounting of all affiliated arrangements across the sponsor's portfolio. Depending on the materiality of the arrangement, the discovery can lead to revised economic terms, additional LP protections in the operating agreement, or withdrawal from the process. Proactive disclosure before diligence begins establishes a reliable foundation for the LP relationship.

Continue reading this series:

• What Family Offices Actually Underwrite Before Returns
• How to Calculate the Right GP/LP Split for Your Deal
• Standard GP Promote Structure for a $100M Real Estate Fund

By the time most founders are rehearsing the pitch, the outcome of the raise has already been set by the structure underneath it. IRC Partners advises operators raising $5M to $250M of institutional capital and accepts seven strategic partners per quarter. If you are going to market this year, have the structure reviewed before investors do. Schedule a call with our team here.