Picking a Property Manager

Be Sure to Evaluate Experience, Specialties, and Services When Selecting a Management Company.


By Joseph W. DeCarlo, CCIM, CPM, CRE 

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More than 25,000 property management companies do business in the United States, ranging from single-person operations to national companies employing thousands of people. Even when property owners narrow down their options by geographical area or property type, numerous choices exist for those who need to hire a property manager. After buying a property, owners often ask their commercial real estate practitioners to refer them to a property management company.

Choosing the right company to manage properties or refer to clients depends on a number of variables. A property manager that doesn't work out or does a poor job for a client could reflect negatively on the referring broker.

Narrowing the Field Anyone considering potential management companies should ascertain some basic information about each company. A referring commercial real estate practitioner can provide a valuable service to clients by knowing this information in advance. Start with determining a company's reputation, how many years it has been in business, and its affiliations and designations.

Next, interview company representatives to learn information such as: What specializations does the company have? What is the staff turnover rate? Does it have a real estate license? Does it have a fidelity bond and carry sufficient insurance? What types of computer systems and software programs are used? Do they have dual drives on the hardware server? What kind of networks and backup systems are in place? Also review the company's Web site.

At Your Service Property management companies should work toward three basic goals: increasing a property's net operating income through rent increases and/or operating expense reductions, increasing property value through proper maintenance and suggestions for improvements, and protecting the value with insurance, inspections, and maintenance.

Most management companies provide services on a third-party basis. A written management agreement delineates the agreed-to services and responsibilities. Basic services provided in most standardized management agreements include the following.

Financial Services. Property managers collect rents and other income from tenants and post collections daily. They maintain the status of each tenant and run tenant delinquency reports and monthly status reports.

They also pay vendors, utilities, and mortgages and provide a monthly check registration. They provide a variety of financial reports, including an annual budget and monthly statements such as profit and loss, rent roll, and check register. When property managers handle security deposits, owners should confirm that they are put in an interest-bearing account and that the interest goes to the owner.

Maintenance. Property managers evaluate vendors, equipment, supplies, and services to keep the property operating in a safe manner and the tenants satisfied. They also handle the hiring, firing, supervision, and payment of the employees assigned to the property.

Property managers oversee routine maintenance such as broken garbage disposals, sewer stoppages, and landscaping, either through on-site maintenance staff or outside vendors. A spending cap, for instance, $1,000, usually exists for non-recurring items other than emergencies.

The property manager should arrange for insurance coverage; usually the owner will add the management company to the insurance policy as additionally insured.

Tenant Relations. Property managers usually have a 24-hour answering service to handle tenant needs, questions, concerns, and emergencies. Tenants are the “customers,” and owners want the property management company to keep them satisfied.

Rental Analysis. Relying on their expertise in the field, property managers provide timely updates and recommendations for rental increases and lease negotiations and renewals. The management company should keep the client informed about trends in the neighborhood and regional market, such as supply and demand ratios.

Auxiliary Services. Many management companies also offer extra services that usually are charged separately. These include:

  • Property tax appeals if the value is less than assessment (the fee for this can be hourly or 50 percent of savings for a time period);
  • Leasing, although for office or retail, a leasing broker may handle this;
  • Property financing or refinancing;
  • Management plans, including analysis of the region, neighborhood, operations, financial status, or recommendations;
  • Consulting on matters such as repositioning the property or changing its use;
  • Property sales; and
  • Supervision of large capital improvement projects over a certain amount, such as $5,000.

Management Specialties Real estate management is both complex and specialized. For example, a property management company that specializes in neighborhood shopping centers with net leases, common-area maintenance charges, and percentage rents would be a poor choice to handle a 16-unit apartment building with gross leases and constant repair requests such as plumbing problems.

An early step in the selection process is to match a property management company's specialty with a client's needs. Three major areas of management expertise are multifamily, retail, and office.

Hands-on management, a simplified monthly reporting process, quick response to client requests and concerns, and a willingness to adapt reporting and management practices to provide specific services are what clients often look for, says Bruce Baker, CCIM, president of Baker Realty Advisors in Overland Park, Kan.

Multifamily. Multifamily property management is the largest property management segment. Large apartment complexes require onsite managers, maintenance personnel, and payroll services, but smaller buildings also require specific services and attention.

Some states, such as California, require an on-site manager if an apartment building is 16 units or larger. The management company would supervise the on-site manager and provide financial reports to the owner.

Management companies that handle large multifamily portfolios often use computerized networks in which rents are posted onsite and sent via modem to the home office, allowing better tracking of delinquencies and cash flow.

The Institute of Real Estate Management (http://www.irem.org/) offers the Certified Property Manager designation to multifamily and other property managers through the completion of specialized courses, testing, and actual management experience. IREM also confers the Accredited Management Organization designation on property management companies that meet specific experience, ethical, financial, and insurance requirements.

Retail. Retail subcategories include strip, neighborhood, community, and regional shopping centers.

On one hand, managing any type of retail property requires specialized accounting skills, software programs to handle CAM charges and billings, and, in some cases, leasing services. However, managing a 10-store strip center is much different from managing a 100-store regional center with large anchor stores and national tenants. A retail property owner first should investigate the size of properties that potential management companies manage.

“Strong market presence for the particular size of a center, competent staff, type of reporting system in place, and familiarity with top management,” are attributes that shopping center specialist Gregory Brown of Marcus & Millichap in Irvine, Calif., considers when giving referrals. Brown generally refers three or four names when asked for referrals.

The International Council of Shopping Centers (http://www.icsc.org/) is a source of companies that manage larger centers. ICSC also offers a study program that results in the Certified Shopping Center Manager professional designation.

Office. Managing large, class A office buildings requires special engineering, administration, and leasing abilities. A management company should be familiar with a wide range of issues.

For example, does a building meet Americans with Disabilities Act requirements for restrooms, elevators, and entrances? Are the lease abstracts laid out so that cost stops can be calculated and extra hours of air conditioning billed? Is the building measured so that the difference between rentable and usable area is calculated? Is the building wired for telecommunications and broadband services?

A management company that handles class B or C office properties might not have the expertise and training to manage a high-rise office building.

The Building Owners and Managers Association International (http://www.boma.org/) is one resource to find management companies experienced in managing class A office buildings. BOMA offers the Real Property Administrator, a designation for office building management.

Other Properties. Properties such as industrial buildings, manufactured-housing communities, self-storage facilities, motels, or tax-credit properties — where tenants have to make 60 percent less than area median income — require specialized knowledge particular to their market, state, and local jurisdiction. A local management company with experience in the specific property type may be a good choice. For instance, manufactured-housing community management requires experience with types of leases, disclosures, and tenant notices that differ from apartments in most states.

Medical buildings, for example, need special attention, such as separating trash into regular and contaminated segments for different methods of disposal.

Properties in unique categories may not be covered by standard management agreements. In that case, the owner and the referring broker should consider a number of issues before signing a contract. Items to keep in mind include: responsibility for on-site maintenance; control of security deposits; approval of invoices and capital expenses; handling of owner indemnification; monthly reporting scheduling; and termination issues.

Some clients need elaborate statements prepared in their own unique format so those building reports can be consolidated with those of other properties from different locations. Or, some clients might want electronic rather than paper statements.

Selecting a Company Most management companies will provide the client and referring broker with free written proposals containing a sample management agreement that describes the services to be provided, spending limits, reports, and fees.

If the management agreement seems reasonable, a visit to the management company offices is useful to meet the property manager and accounting personnel who would be assigned to the property. The management company should provide a variety of references. Ask to visit similar properties that the company manages.

Management agreements usually are for one year and renew month to month after the first year. A penalty usually exists if the owner breaks the contract in the first year.

Management fees normally are charged based on a percentage of income collected with a minimum monthly base fee. Larger properties usually command a lower percentage rate (for example, 2 percent) than a duplex or four-plex that may be quoted up to 10 percent.

Fees are negotiated on a per-property basis and depend on many factors including property condition, location, and size. Leasing and other auxiliary service fees are separate and in addition to management fees.

Making a Referral The decision to give a property management company a referral deserves serious consideration and should be done with due diligence and careful thought.

Some property management company agreements contain a clause giving the management company the exclusive right to sell the property during management and up to one year after the termination of the management agreement. Many brokers refer clients for property management only and want to represent the client if he or she decides to sell the property. Many brokers want assurance that the property won't later be listed by the management company. Some brokers may insist that the property management company sign a non-compete letter that they will not list the referred property.

Establish Relationships Be prepared to help clients select a good property management company to increase their properties' rents and asset value.

It's a good idea to establish mutual working relationships with management companies that specialize in various property management niches. In turn, these management companies may refer clients to you who want to sell properties.