As an owner of commercial property, the property manager is an agent acting as a trustee on your behalf. The property manager’s primary objective is to oversee the maintenance of rental property, rent to suitable tenants, collect rent and account to the owner.
Qualifications a property manager should have:
• Prior experience handling and reporting trust account activities;
• An adequate computer system to record and track activities on properties
• A competent staff to perform office and field duties and to quickly respond to both the landlord’s and the tenants’ needs.
• Handling and accounting for all income and expenses produced by the property
• Contracting for services, repairs and maintenance on the property
• Monitoring utility services provided by the landlord
• Responding in a timely manner to the needs of the tenants
• Evaluating rental and lease agreements periodically
• Serving notices on tenants and filing unlawful detainer (UD) actions as needed
• Performing regular periodic property inspections
• Keeping secure any personal property
In addition, the property manager must also:
• Confirm or obtain general liability and workers’ compensation insurance sufficient to protect the landlord, naming himself as an additionally insured
• Obligate the landlord to only authorized agreements
• Maintain the property’s earning power, called goodwill
• Hire and fire on-site employees as needed
• Comply with all applicable codes affecting the property
• Notify the landlord of any potentially hazardous conditions or criminal activities affecting the health and safety of individuals on or about the property
The “Prudent Investor” Standard
A property manager must employ a higher standard of conduct regarding the operation of a property than a typical investor might apply. This standard in commercial real estate management is called the prudent investor standard. A prudent investor is a person who has the knowledge and expertise to determine the wisest conduct for reasonably managing his property. The prudent investor standard of conduct is the minimum level of competency which can be expected of a property manager by a landlord, whether or not the landlord would apply the standard or even know about it.
A landlord’s primary business reason for hiring a commercial real estate management company is to have the property manager maintain the condition of his investment and income.
Decisions regarding the care of a property should be made by the property manager based on the need to generate a reasonable income from the property and incur expenses necessary to preserve the habitability of the property, provide a safe and secure environment for persons on the property and maintain the property’s condition so it will support the rent charged.
Commercial real estate management companies structure management fee schedules in several different ways:
1. A percentage of the rents collected.
The property manager is entitled to charge a set percentage of the rents collected as a fee (customarily between 5% to 10%), usually payable monthly. The percentage fee is not paid on security deposits since deposits are not rents.
2. Fixed fee
The property manager and landlord agree in advance to a set dollar amount to be charged monthly for the management services.
The amount stays constant whether or not the units are rented. This method, however, lacks the motivational incentive to induce the property manager to generate maximum rental income.
3. A percentage of the first month’s rent.
4. A front-end fee paid to the property manager is called a leasing or origination fee. If the landlord agrees, a fee can be charged for exercise of an option to renew or extend, or when a new lease is entered into with an existing tenant.
Accounting to the Landlord
All landlords are entitled to a statement of accounting no less than at the end of each calendar quarter. Most landlords will require monthly accounting in their commercial real estate management agreements.
Property Inspections by the Manager
Inspections determine the physical condition of the property, availability of habitable units or commercials spaces and the use of the leased premises by existing tenants.
Several key moments when a property manager should make an inspection include:
1. When the property manager and landlord enter into a property management agreement.
Any deferred maintenance or defects which would interfere with the renting of the property should be discussed with the landlord.
2. When space is leased to a new tenant.
A walk-through should be conducted with a new tenant prior to giving them occupancy. The property’s condition should be noted on a condition of premises addendum form and signed by the tenant.
3. During the term of the lease.
While the tenant is in possession, the property should be periodically inspected by the property manager to make sure it is being properly maintained.
4. When the tenant vacates.
The property’s condition should be compared against its condition when first occupied by the tenant. Based on differences in the property’s condition as documented by the property manager, the reasonable amount of deductions from the tenant’s security deposit for corrective repairs can be documented when accounting for the return of the deposit.
5. When the property manager returns management of the property back to the landlord or over to another management firm.
This inspection helps to avoid disputes with the landlord or tenants regarding just what the condition of the property was when management was transferred to and from the property owner.
Maintenance and Repairs
Obtaining the highest rents available requires constant maintenance and repair of the property. The property manager is responsible for all the maintenance and repairs on the property.
The property manager’s knowledge of the property’s condition prior to entering into a commercial real estate management agreement is a must in order to properly ascertain what maintenance and repairs need to be made or will be deferred.
The responsibility for maintenance includes:
• Determining necessary repairs and replacements
• Contracting for repairs and replacements
• Confirming completion of repairs and replacements
• Paying for completed repairs and replacements
• Advising the landlord about the status of repairs and replacements in the monthly report.
Usually, landlord set a ceiling on the dollar amount of repairs and maintenance the property manager has authority to incur on behalf of the landlord. If maintenance or repair work is done by the property manager’s staff or he stands to additionally benefit financially by the materials purchased or services performed, the property manager must disclose his financial involvement to the landlord.
As I have said before, if I may be of assistance with your real estate questions please contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this article.