Chapter 18

TYPES OF PROPERTIES REQUIRING MANAGEMENT. 

All types of property, from farms to hotels need efficient management for a smooth and productive operation. The most common types of properties requiring full or part time management are office and industrial buildings, store properties and residential buildings. Management may involve a single building or a complex, such as an industrial park or a shopping center.

The property manager's task is: (1) to produce the highest possible profit for the owner, (2) to protect the owner’s interest and (3) to free the owner of the burden of operation of the property. A great degree of skill is required on the part of the manager in advertising, showing and selecting tenants. The property manager must have a thorough understanding of leases, tenancy agreements and other legal documents involved in the operation of income property. The property manager must also see to it that the property is kept well maintained, repair work is done promptly and vital services are provided without interruption.

TYPES OF MANAGERS. 

Property managers vary from the large firm specializing only in property management, to the small office, which manages a few properties as part of its brokerage operation. A building manager is employed by a firm or an owner to oversee the management of a single building. A resident manager is a building manager who lives in the building. Building and resident managers are usually paid a straight salary. A management company is compensated on a fee basis depending upon the gross rents and the number of rental units.

FUNCTIONS OF PROPERTY MANAGERS. The functions of the property manager are to:

1. Secure tenants and lease space.

2. Collect rents and keep records.

3. Maintain the property.

4. Hire and fire on-site personnel.

5. Keep the premises properly insured.

6. Keep proper records and render periodic reports.

RENTALS AND LEASES

 In order to effectively market space, the property manager must establish a rental schedule and attract prospective tenants. Before entering the market, the property manager must make a thorough analysis of the property involved to assess its values objectively. It is important to have an accurate knowledge of such matters as the character of the neighborhood, the advantages and disadvantages of the location of the property, the character of competing space in the neighborhood, rents currently charged for similar space and the nature of potential demand.

Since rental prices are usually established by supply and demand, most rental schedules can be established on a market comparison basis. The manager compares his or her units to other units renting in the same area and adjusts his or her rents up or down to compensate for the differences in age and modernity of the apartments. As a rule, rents should be adjusted for an optimal 95% occupancy. Rents should be raised for fully occupied type of units and lowered for units with less demand.

 Since the purpose of renting is to provide a reasonable return on the owner's investment, the rents must be high enough to provide a gross return, which will net the owner a profit after deducting expenses and management costs.

ATTRACTING AND SECURING TENANTS. 

This is one of the most vital functions of a property manager. A smooth-running building with all rents paid on time and a minimum of complaints and vacancies can only be achieved through the proper selection of tenants. The property manager must find tenants whose specific needs and requirements match the service opportunities that the property has to offer. Advertising should describe the apartment fairly and accurately. Overstating the condition or desirability of the apartments will result in wasted time and effort and unhappy tenants.

The most important criterion for selecting tenants is the tenant’s capacity and habit of paying rent. This can be determined by checking work or business references, the previous landlords, and through credit reports relating to outstanding notes, mortgages, judgments or other debts. Many rental agents insist that the prospective tenant leave a deposit equal to one month’s rent with their application for the apartment, pending a credit investigation. A person’s inability to make such a deposit might be an indication of a problem in making future rent payments on time.

COLLECTING RENTS. 

A rental collection policy should be established to assure that all tenants pay regularly and promptly. Tenants should be impressed with the importance of paying their rent on time. A procedure of follow up of past-due rentals should be rigidly and uniformly adhered to. Within five to ten days after the rental due date, a statement for past-due rents should be sent to delinquent tenants. A week or ten days later, a final notice should be sent. If the notices are ignored, legal proceedings should be considered in order to obtain possession of the premises or to collect the unpaid rent.

REPAIRS AND MAINTENANCE.

The property must be given constant care and attention in order that the owner’s investment may yield the highest possible net return over its economic life. Tenants will be happier and there will be less turnover when the building is kept clean and attractive and in good repair. A regular schedule of inspections and maintenance must be maintained. Some of the key factors in building maintenance are as follows:

1. All complaints must be answered promptly.

2. Buildings should be kept clean and attractive.

3. Frequent inspections should be made.

4. Halls should be lighted and elevators should be in good working order.

5. The superintendent should be checked for proper performance.

6. Heating systems and service utilities should be kept in proper order.

7. Conditions of the sidewalks, stairs, flooring, roofing, wiring and plumbing should be constantly checked for safety.

Deferred maintenance or failure to undertake preventative maintenance can lead to major problems, often involving emergency repairs at inconvenient times.

REPAIR EXPENDITURES. 

The property manager may refer work to a general contractor or deal directly with suppliers and workers. Better service usually results when the workers are under the direct control of the manager, who may be a little more prudent about the purchase of materials than a general contractor. The property owner is billed for actual expenditures plus a nominal overhead service charge of five or ten percent for job superintendence.

MAINTAINING PROPER RECORDS AND RENDERING PERIODIC REPORTS. 

The property manager must maintain an adequate system of accounts and make regular monthly reports to the owner. A detailed annual report for purposes of cost accounting must be made annually in order for the manager and the owner to review the fluctuations of income and expenses, and to predicate, thereon, future decisions with respect to rentals, maintenance and productivity of the property as an investment. The property manager may also submit an "after tax" cash flow analysis at year’s end.

RISK MANAGEMENT. 

One of the most important responsibilities of a property manager is to protect the owner from monetary losses resulting from unsafe property conditions, fires and other hazards. Recognizing potential perils and taking proper action to prevent or minimize a loss is known as risk management. Potential areas of loss can be dealt with in various ways. The risk may be avoided by eliminating it, or controlled by safety precautions such as installing sprinklers, fire doors and smoke detectors. Some of the risk may be retained by insuring with large deductibles. Major risks, such as fire and liability are best managed by transferring the risks to an insurance company, i.e. buying insurance.

VARIOUS TYPES OF INSURANCE FOR COMMERCIAL PROPERTY

There are three major areas of risk which must be insured against: (1) fire and related hazards, (2) personal injury claims and (3) claims by employees injured on the job. The three types of policies to cover these risks are: (1) fire and hazard insurance, (2) liability insurance and (3) worker’s compensation insurance. Optional policies may be obtained to cover low risk activities.

FIRE OR HAZARD INSURANCE. 

Hazard insurance pays for losses resulting from fire, windstorm, explosion, hail, smoke damage and civil insurrection. The amount paid for losses is determined in one of two ways: (1) The actual cash value or replacement cost less depreciation or (2) the replacement cost.

 Most commercial policies contain a "cp-insurance” clause, which requires that the property be insured to at least of its replacement value at the time of the loss, in which case the insurer will pay for the actual replacement cost of the damaged portion of the property up to the face amount of the policy. If the coverage is less than 80% at the time of the loss, the insurer pays only a percentage of the loss, and the owner becomes a "co-insurer" for the balance. Most mortgages contain a covenant requiring the owner to carry sufficient fire or hazard insurance to protect the lender in case of loss.

For example, a building, which has a replacement value of $600,000, is damaged by fire, and the estimated cost of repairs is $400,000. If the building owner had carried $480,000 of insurance, the full amount of the claim would be paid. If the owner carried less than the 80% required, the loss would be prorated between the insurer and the owner. For example, if the building was only 60% insured at the time of the loss, the insurance company would pay only $300,000, i.e. 60% divided by 80% = 75% x $400,000 - $300,000. In any event, the insurer will pay no more than the face value of the policy.

LIABILITY INSURANCE. 

Liability insurance protects the owner against claims for personal injury and property damage resulting from the owner’s negligence or failure to correct unsafe conditions. The owner is responsible for the safety of tenants and their guests in the public areas such as walkways, entrances, halls and stairwells. The owner is not responsible for injuries occurring in the tenants’ rental units unless the injuries were caused by the owner’s failure to maintain the rental unit in a safe and habitable condition.

WORKER’S COMPENSATION INSURANCE. 

State law requires employers to carry worker’s compensation insurance to pay for the medical or hospital payments resulting from injuries sustained by employees while in the course of their employment. Although the building owner is not liable for injuries sustained by an independent contractor, the owner could be held liable for injuries sustained by employees of the independent contractor. To avoid such risk, the manager should require all independent contractors to submit proof that they have worker’s compensation insurance prior to beginning any job.

OPTIONAL INSURANCE. 

The owner may wish to carry casualty insurance for theft, burglary, plate glass breakage, elevator accident, steam boiler, machinery and loss to the building contents. Business Interruption insurance compensates the owner for loss of rent due to damage or destruction of the building. Increased Cost of Construction endorsement, although expensive, is advisable for older buildings. It covers the cost of repairing a building after a loss to comply with the latest safety and fire codes. A demolition cost rider covers the cost of demolishing only the undamaged portion of a building caused by a loss to comply with state or local law regulating repairs or construction of buildings.

Subrogation. Subrogation gives an insurance company the right to pursue a claim, which the owner (insured) would have against a third party who caused the loss. For example, a building is damaged by a fire resulting from a tenant’s careless disposal of a lighted cigarette. The insurance company has the right under subrogation to hold the tenant responsible for the amount the insurer paid to the owner for the loss. Tenants should be informed of this potential liability and be advised to carry appropriate insurance for their protection.

PRIVATE DWELLING INSURANCE

HOMEOWNER’S INSURANCE. 

Homeowner’s insurance is a package policy, which provides residential property owner coverage for fire losses and personal liability claims. The policy insures holders against damage to their property by fire or windstorm, injury to others that occurs on the premises, and theft of, or damage to personal property on or off the premises. The liability coverage includes injuries to others resulting from the owner’s negligence and physical damage to property of others caused by the insured. Homeowner’s insurance policies contain an 80% co­insurance clause.

THE MANAGEMENT CONTRACT

The management contract may vary depending upon the responsibilities assumed by the manager. In most cases, the contract provides for the manager to rent the units, collect the rents, maintain the property and pay for normal operating expenditures out of receipts. The following items should be covered by a management contract: 

1. Identification of the names of the parties to the contract.

2. Complete description of the property to be managed.

3. Term of contract, effective and termination dates.

4. Compensation clause and agreement to reimburse agent if collections are insufficient to meet operating costs.

5. Statement of authority of agent to assume charge of building employees, building operation, relations with tenants, and expenditures.

6. Statement of powers and authority of agent to execute leases, collect rent, terminate tenancies, return security deposits, evict tenants and bring legal actions.

7. Maximum to be spent for expenditures without having to notify owner.

8. Limitations of rights to contract for utility services, rubbish removal and window cleaning.

9. Authority to hire and fire personnel.

10. Amount allotted for advertising budget.

11. Clarification of the responsibilities for payroll, insurance, purchasing, building expenses, advertising and commissions to leasing agents.

MANAGEMENT FEES

The management fee may be a flat amount or it may be combined with a percentage of the gross rents. 

For example, a 20-unit building grosses $36,500. The manager receives an annual fee of $125 per unit or $2,500 plus a percentage of the gross rents. 

The percentage rate is determined by dividing the unit fee by the effective gross rents (gross rents less vacancy allowance). 

Allowing $1,825 for values, the effective gross rent is $34,675 ( $36,500-$1,825 ). 

Break down:

$36,500 - Gross rents

$34,675 - Effective gross rents

$125 - Annual fee per unit ( $125 x 20 = $2,500 )

$2,500 divided by $34,675 = 0.0721 ( rounding to 7%) ----> 7% x $36,500 = $2,555 plus $2,500 = 

$5,055 total annual management fee.

LICENSE REQUIREMENT FOR PROPERTY MANAGERS. 

Property managers and their regular em­ployees, while acting under a management contract, are not required to be licensed.  However, a property manager who receives an additional fee or commission for selling the owner’s building is required to have a real estate broker’s license.

KEY WORDS AND PHRASES