What You Should Know About Property Management Of Commercial Properties
Now that you have made an offer to acquire commercial property and are waiting to close the escrow, you may want to start looking for a property manager to professionally manage the property. Your real estate investment advisor should introduce you to 2 or 3 local businesses, each with its own proposal. Your job is to decide which company to hire. The property manager will be the main point of contact between you, as the owner, and the tenants. Its main job is:
- Receive and collect rents and other payments from your tenants. Usually this is simple until a tenant submits the rent check. A good property manager will somehow make the tenant pay the rent, while a lousy one will throw a monkey on their back!
- Hire, pay, and supervise staff to maintain, repair, and operate the property, for example, garbage collection, window cleaning, and landscaping. Otherwise, the property loses its appeal and clients are unable to sponsor their tenants’ businesses. The tenants then cannot renew their lease. As a consequence, you may not realize the expected cash flow.
- Rent any vacant space.
- Keep an accurate record of income and expenses, and provide a monthly report.
A good property manager is critical to keeping your property fully occupied with the highest rent on the market, happy tenants, and in turn helping you achieve your investment goals. Before choosing a property management company, you may want to:
- Interview the company focusing on how the company handles and solves problems, for example late payments.
- Talk to the person who will manage the property on a day-to-day basis, as it may be a different person than the one signing the property management contract. You want someone with strong interpersonal skills to deal effectively with tenants.
The property management company usually wants a contract for at least one year. The contract should specify the property manager’s duties, compensation, and what the owner’s approval will require.
Agent compensation: You will have to pay someone to manage and lease the property. You may have one company to manage the property and a different company to lease the property. However, it is best to work with a company that handles both management and leasing to save time and money.
- Management commission: The fee varies between 3% and 6% of the basic monthly rent for a shopping center, depending on the amount of work required to manage the property. For example, it takes much less time to run a $ 2 million retail center with a single tenant than a $ 2 million retail strip with 12 tenants. So for the center with 12 tenants, you may have to pay a higher percentage to motivate the property manager. You must negotiate the rate as a percentage of the base rent rather than the gross rent. Base rent does not include NNN charges. Ideally, you want a lease where tenants pay their share of the property management fee.
- Late fee: When a tenant pays late, the lease often requires them to pay a late fee. The property manager can maintain this fee as an incentive to collect the rent.
- Lease fee: This fee compensates the property manager for leasing any vacant space. In a typical lease, the leasing company wants 4 to 7% of the gross rent for the life of the lease. You also want the rental fee to be paid when the new tenant moves out. Also, the leasing company wants about 2% of the gross rent when the lease is renewed. The tenant can also apply for a Tenant Improvement (TI) credit, usually between $ 10-20 per square foot to pay for construction expenses. So if a new tenant with a 10-year lease goes under after a year, they may lose money. As a landlord, you must:
- Approve a long-term lease (10 years or more) only when the tenant’s financial strength is solid. Otherwise, it may be better to reduce the lease to 3-5 years.
- Make sure the new lease has a provision for some kind of rent increase, preferably based on the Consumer Price Index (CPI), that is, an inflation that is 3-4% per annum rather than a fixed annual increase less than 1-2%.
- Consider the tenant’s IT request as one of the factors in approving a lease. IT credit depends on whether you need the tenant more or whether the tenant needs you more.
- Negotiate a flat renewal fee, for example $ 500 instead of paying a percentage of the rent for the life of the lease. Negotiation is easier with a company that handles both leasing and administration.
- Negotiate to pay the leasing agent a lower percentage, for example 4% when no outside leasing broker is involved.
You can see that minimizing the tenant turnover rate is very important as it has a direct impact on the cash flow of your commercial property. A good property manager will help you achieve this goal.
Monthly report: Each month the property manager should send you a report on income received, expenses incurred, and the condition of the property. You should review the report to see if the numbers make sense. It should:
- Request a report showing CAM and rental rates received.
- Request a separate bank account for your property and receive a monthly bank statement. Without this, the property manager will deposit and combine all the rents for all the properties that he manages into his business bank account.
If you direct the property manager to send you the excess cash flow, you will also receive a check.
Owner approval: the management contract must specify the dollar limit for exceptional maintenance expenses above which it would require your approval. This amount varies from one owner to another, as well as the type of property. However, it is usually around $ 500 to $ 2,000.
Communication with the property manager: In the first few months, you and the new property manager should communicate frequently to make sure everything goes smoothly. You must give written instructions, for example email, to your property manager and keep records of all your correspondence. If the property manager does not do as instructed, you can check their records and minimize disputes.
If you want to work hard for your money, you may want to manage your own property. However, if you want to work smart, your partner must be a good property manager.