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How many millions will H&R CEO get for buying Primaris?

Tom Hofstedter, the chief executive officer of H&R REIT, and his family could get a cheque for millions, if not tens of millions, for buying Primaris Retail REIT, but no one knows exactly how much the final payment will be.

Like many real estate investment trusts, H&R's properties are managed by an external company, H&R Property Management, which takes care of day-to-day operations such as leasing. This company is owned by members of the Hofstedter family as well as by members of the Rubinstein family (the "R" in H&R), and is paid annual fees that amount to 2 per cent of the REIT's gross revenue every year.

However, the external manager is also entitled to incentive fees, particularly for acquisitions and development. If H&R buys a property, the external manager is paid two-thirds of 1 per cent of the total acquisition cost.

That may not sound like much, but it becomes an astronomical sum in a $4.6-billion deal – roughly $30-million.

Such a cheque would come on top of the roughly $3-million H&R Property Management was paid when the REIT bought one-third of Scotia Plaza last year.

But there's a caveat with the Primaris transaction. No one knows whether H&R will stay externally managed should the takeover go through. Primaris is internally managed, and the very first analyst question on the conference call Thursday related to what type of management the combined company will use.

Instead of offering a definitive answer, Mr. Hofstedter reverted to a prepared statement and said "the external managers have agreed to re-evaluate the terms of the existing property management agreement for the purpose of considering and implementing desirable amendments acceptable to both parties." The only thing he could say for certain was that a revised management agreement will be available before the shareholder vote.

Yet even if the external management contract is ultimately torn up, the combined REIT will have to buy out the external manager, and the cost of doing so will likely include compensation for the acquisition fees. Analyst Michael Smith at Macquarie Securities noted the buyout "could cost well in excess of $100-million."

In an interview Thursday, Mr. Hofstedter refused to confirm any numbers around a buyout or an acquisition fee, simply noting that the negotiators will "arrive at something that will be amicable to everybody."

So much for clarity.

(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)