California Real Estate Practice Chapter 12 Rockwell Slides

Corrective maintenance

Corrective maintenance is ongoing repairs that are made to a building and its equipment to restore it to good operating condition. Corrective maintenance includes all repairs to keep structures, fixtures, utilities, and amenities in proper working order or condition. Fixing a broken window or a leak in the roof would be considered corrective maintenance.

Vacancy factor

(Bad debt factor) Estimated amount for delinquent rents and vacancies

Management Plan: Owner's approval

Finally, the property manager presents the completed management proposal to the owner. The proposal may be adjusted in response to the owner's concerns. When the owner approves the manager's proposal, it becomes the management plan: the blueprint for managing the property to achieve the owner's goals.

Housekeeping

Housekeeping simply refers to the cleaning of the building's common areas and the grounds, to keep the property presentable. Vacuuming the lobby and picking up litter are examples of housekeeping.

Types of Managed Properties: Retail space

In a shopping center, leasing is an especially critical task for the property manager. The success of one retail tenant is tied to the success of the other tenants in the shopping center. Customers attracted to the center by one business are likely to patronize the other businesses there. Therefore, getting the right mix of high-quality tenants is essential. Another reason tenant selection is particularly important in retail leasing is that the amount of rent paid often depends on the success of the tenant's business. A retail tenant is frequently required to pay a fixed rental amount plus a specified percentage of the income generated by the business. *Retail Lease -Tenant to pay landloard base rent plus a percentage of gross earnings.

Management Proposal: Budget

In addition to developing a proposed rental schedule for the property, the manager develops a proposed budget. The budget includes anticipated property income and projected operating expenses.

Leasing and Tenant Relations: Security deposits

In addition to handling rent collection, a property manager is responsible for accepting and handling security deposits. Both commercial and residential tenants are typically required to provide a security deposit at the beginning of the lease term. This deposit is intended to provide the owner with some assurance that the tenant will maintain the property in good condition and make all rental payments as agreed. The lease agreement should state the deposit form and amount, and name the party collecting the deposit. You may want to include a provision instructing the tenant against using the deposit to pay the last month's rent. The lease agreement should also state clearly the conditions under which the deposit will be returned to the tenant. * Lease Agreement Tenant agrees to pay $500 as a security deposit. Deposit will be held by landlord. Deposit may be used to cure tenant's default in rent payments, repair damages, or clean premises if necessary. After tenant vactes premises, deposits will be returned to tenant less any deductions as stated above. Note that state law limits the amount of residential security deposits to no more than two months' rent for an unfurnished property, and no more than three months' rent for a furnished property. When the tenant moves out, the landlord has 3 weeks to provide the tenant with an itemized list of deposit deductions, along with any remaining deposit balance.

Management Proposal: Day-to-day operations

In addition to long-range financial planning, the management proposal will also include the property manager's plans for the property's day-to-day operations. This includes: -marketing, -staffing needs, -maintenance requirements, and -policies and procedures for administration.

Manager/Owner Relations: Keeping in touch

In addition to providing a regular statement of operations, the property manager should make personal contact with the owner periodically, either over the phone or in person. This is generally the best way to explain a problem or propose a new course of action. When a monthly report is especially unusual, it may be a good idea to arrange a formal meeting with the owner to discuss it.

Regional Analysis: Market rental rates

In addition to watching occupancy rates, a property manager keeps an eye on market rental rates. Market rental rates are the rents currently being charged for comparable properties. The manager must set the rents at a level that will make the managed property competitive in the current market. -Sources of Rental Rate Information One source of information on rental rates is published statistical reports, such as the Department of Labor's statistics on rents paid for residential units. A property manager can also keep statistics (such as the average monthly rent per unit) on the properties she is managing. These statistics can be combined with statistics kept by other managers in the area. Rents listed in the classified ads may also provide useful information.

Management Plan: The owner's goals

In preparing a management plan, the manager must always keep the owner's goals in mind. There are a variety of reasons for owning income-producing property, so not every owner has the same goals. For example, one owner might want to increase the property's value in order to realize a substantial profit on a later resale of the property. Another owner might be primarily concerned with generating a steady and reliable income from the property. Sometimes an owner is simply holding the property as a tax shelter. Each of these goals may require a different management strategy. *reasons for owning income-producing property -Resale Profit -Tax Shelter -Income

Management Plan: Revision

In some cases, the owner's goal may change over time. For example, an owner's main concern at first might be maximizing the property's value as a long-term investment. But later the owner may become more concerned with generating income from the property. A change in goals generally means that a new management plan is necessary. *Management Plan -Long-Term Investment -Generating Income

Investing in Real Estate

It's important to understand why people choose to invest in real estate, because the primary function of a property manager is to help the property owner achieve her investment goals. So we'll take a few minutes to discuss the advantages of investing in real estate. An investment is an asset that is expected to generate a return (a profit). A return might be in the form of interest, dividends, or appreciation in value.

Management Functions: Leasing and tenant relations

Leasing and tenant relations includes everything from negotiating leases, to addressing tenant complaints, to collecting rents. The manager gets the ball rolling by marketing the property to attract good tenants.

Statement of disbursements

List of all expenses paid during report period.

Fixed expense

A fixed expense is a property management expense that remains the same regardless of rental income (such as property taxes). Fixed Taxes: -Property Taxes -Insurance Premiums -Salaries

Signing a Lease: Use of the premises

A lease cannot be valid unless it has a legal purpose. For example, a lease for a house of prostitution would be void and unenforceable. But a tenant may use the property for any legal purpose unless specific limitations are stated in the lease.

Types of Managed Properties: Office buildings

Maintenance is often a much bigger concern for office buildings than for apartment buildings. In an office building, the common areas often require much more attention than the common areas of apartment buildings. For example, there are often public restrooms that require maintenance throughout the day. In many cases, the management is also responsible for cleaning the office spaces every night. Leasing arrangements are also very different for an office building than for an apartment building. The leases are generally longer, and rent is based on price per square foot, rather than per unit. Many office leases include an escalation clause, providing for periodic rent increases. *Office Lease -Longer than residential leases -Priced per square foot -Escalation clauses common Leasing office space is competitive. To attract office tenants, landlords typically have to offer substantial concessions, such as extensive remodeling to suit the tenant's needs, or free rent for a limited period.

Leasing Techniques: Signing a lease

A lease is a contract for possession of real estate in exchange for payment of rent. If the prospective tenant approves of the property, and the property manager and owner approve of the tenant, the next step is to enter into a lease or rental agreement. The lease is a contract between the landlord (the property owner) and the tenant, allowing the tenant to occupy the property on certain terms in exchange for rent. Any lease should be put into writing, for the protection of both parties. Note that if the lease is for a fixed term, it will not be legally enforceable unless it is in writing. The written lease should be signed by the tenant and by the landlord. The property manager may sign the lease as the landlord's agent, if the manager is authorized to execute leases. A lease isn't enforceable without the signature of the landlord (or the landlord's agent). Since a lease is a legal contract, both the tenant and the landlord must be legally competent when the lease is signed. Every lease must include the names of the parties, a description of the property, the amount of the rent, and the duration of the tenancy. No particular language is required for a valid lease, but the document must clearly indicate the intention to lease the property. *Lease -Names of the parties -Description of property -Amount of rent -Duration of tenancy -Intention to lease property

The Landlord-Tenant Relationship: The lease

A lease is an agreement between a landlord and tenant that allows the tenant to take possession of a property for a period of time, in exchange for rent. Because a lease is a contract, it is not valid unless it includes all of the essential elements of a contract, such as capacity and mutual assent.

Management Plan

A management plan states the property manager's strategies for achieving the property owner's goals. It includes a plan for the financial management and the physical maintenance of the property. The management agreement creates a basic framework for the property manager's activities. But the first step in actually managing the property is to draw up a management plan. A management plan sets forth the property manager's strategies for achieving the property owner's goals. It addresses issues of financial management and the physical maintenance of the property.

Types of Managed Properties: Industrial property

Many industrial properties are very large, very specialized, and very expensive to build. Because of this, industrial leases are usually long-term, from 10 to 25 years. So it is vital for a tenant to be matched up to the correct property. A quick turnover can spell financial disaster for industrial properties. Many property managers rely on leasing agents to find industrial tenants. These leasing agents invest a lot of time and energy into studying the physical aspects of the property, the nearby transportation services, and the supply of and demand for the prospective tenant's products. However, even if the property manager is not going to be prospecting for tenants himself, he must be aware of alternative uses for the property. This is especially important if a current tenant were to leave suddenly. Warehouses and storage spaces provide the exception to the general rule regarding long-term leases for industrial properties. Tenants for warehouse and storage space tend to come and go, and finding new tenants would be an important part of the property manager's job.

Marketing: Signs

Many property managers post signs on the building that tell passers-by how to contact the manager for rental information. These can be displayed whether or not there are currently any vacancies. These signs don't necessarily bring in a large number of potential tenants, but those they do bring in are particularly interested in that specific property.

Marketing: Internet

Many sites on the Internet (craigslist is a good example) are effective places to advertise real property rentals. Internet ads can be placed quickly, and photographs and extensive information about the property can be included at little or no cost. A property manager may want to maintain a website to advertise properties that she manages. For a large complex or building, it might be worthwhile for it to have its own website.

Economic shortage

More able-to-pay tenants than units

Technical shortage

More potential tenants than units.

New construction

New construction includes remodeling or redecorating to make the property more marketable. The property manager often has to arrange alterations of office space or retail space to meet the needs of a new tenant. When the building itself is new, the interior spaces may be left unfinished until they are leased, and then completed in accordance with the tenant's specifications. A property manager dealing with new construction or remodeling should keep in mind that federal law now requires public accommodations to be accessible to the disabled.

Marketing: Newspapers

Newspaper advertising includes classified ads and display ads. The classifieds section of the paper prints inexpensive, brief text ads organized by property type and neighborhood (e.g., "Houses for Rent—Highbury"). This is the standard method for advertising residential rentals, and an informative, well-written classified ad can be very effective. Display ads are larger and more expensive than the classifieds. A display ad often includes a picture of the property and may appear in any section of the newspaper. Display ads are frequently used to advertise a new office building, shopping center, or industrial park.

The Budget: Expenses

Next, the manager lists the projected operating expenses for the property. Operating expenses include both fixed expenses (such as property taxes, insurance premiums, and employee salaries) and variable expenses (such as utilities, maintenance, and repairs). *Operating Expenses Fixed Taxes -Property Taxes -Insurance Premiums -Salaries Variable Expenses -Utilities -Maintenance -Repairs

Management Plan: The management proposal

Once the preliminary study is completed, the property manager develops a management proposal. This is a draft strategy to present to the property owner for approval. The management proposal includes a proposed rental schedule; income and expense projections; a plan for day-to-day operations; and in some cases, proposed physical changes to the building. *Management Proposal -Rental schedule -Income & expense projections -Day-to-day operations -Proposed physical changes

Management Proposal: Rental schedule

One important component of the management proposal is the rental schedule, which is a list of the rental rates assigned to each type of unit in a given building or space in the managed property. Rates vary depending on unit size, location in the building, and any special amenities (such as a view) that certain units have. The property manager selects proposed rates for each type of unit based on the information gathered in the preliminary study. Taking the regional, neighborhood, property, and market analyses into account, the manager tries to set the highest rents that can be charged while maintaining a desirable occupancy rate. In setting the rate for a particular unit, the manager adjusts the market rental rate for the average comparable unit either up or down to reflect differences (positive or negative) in that type of unit. Once a rental schedule has been adopted for the property, it must be reviewed periodically and adjusted if necessary so that it's in line with the current market rates. The rental schedule also has to be reviewed periodically to see if it was correctly set to begin with. An unusually high vacancy rate for the property is an indication that the rents charged are too expensive for the neighborhood. On the other hand, an unusually low vacancy rate suggests that the rents charged are lower than they need to be for the market. High vacancy rate = rents too high Low vacancy rate = rents too low

Preventive maintenance

Preventive maintenance is a program of regular inspection and care to prevent potential problems. Preventive maintenance preserves the physical condition of the improvements, which also reduces corrective maintenance costs. Cleaning out gutters is an example of preventive maintenance. If gutters aren't kept free of leaves and other matter, they overflow, leading to the deterioration of the building's eaves or exterior walls.

Property Management Agreement: Manager as an agent

Property manager owes standard agency duties to owner Remember that a licensee working as a property manager is an agent of the owner. So the licensee owes the owner the standard agency duties of reasonable care and skill, good faith and loyalty, disclosure of material facts, and accounting.

Investing in Real Estate: Leverage

Real estate investors sometimes increase their return through leverage, which is using borrowed money to invest. If an investor borrows money to buy an asset and the asset appreciates, she makes money on the money she borrowed.

Agreement provisions: Maintenance and services

Repairs and improvements may be completed, ordered, or supervised by the manager. The manager is authorized to hire workers, buy supplies, and pay bills for this work. The owner can require the manager to seek approval for expenditures over a certain amount. However, this approval isn't necessary for regular monthly operating costs and any emergency expenditures.

Property Management Agreement (Sections)

Section 1 APPOINTMENT OF BROKER of this form contains all of the management agreement provisions we've mentioned. Let's take a look at how you would fill out this form. At the top of the form, identify: -the property owner and -the property manager (the broker), -along with the property or -properties to be managed. Then fill in the start and end dates of the management term. Note that with this clause, the owner gives the manager the exclusive right to: -rent, -lease, -operate, and -manage the named property. Note that like a listing agreement, the property management agreement is between the owner and the broker, even though the broker's salespersons may be involved in executing the agreement's provisions. In section 2 BROKERS ACCEPTANCE of the management agreement, the manager agrees to perform her duties diligently. She also agrees to use her brokerage services for: -renting, -operating, and -managing the property. The scope of the manager's authority is spelled out in Section 3 SCOPE OF MANAGERS AUTHORITY. -Advertising and rental agreements -Tenancy termination -Maintenance and services -Expense and trust accounts -Disbursements Section 4. OWNERS RESPONSIBILITIES The owner must give the manager all of the information and paperwork needed to manage and operate the property. The owner agrees to release the manager from liability for any costs and claims related to the manager's duties. In subsequent paragraphs, the owner agrees to maintain insurance sufficient to protect both the owner's and the manager's interests. The manager must be specifically named as an insured party on the insurance policies. In section 5 OWNERS REPRESENTATIONS of the agreement, the owner verifies that he is not aware of any notices of default, loan delinquencies, bankruptcies, lawsuits, or special assessments that might affect the property. In section 6 TAX WITHHOLDING of the agreement, an owner who isn't a California resident will allow the manager to withhold a certain amount of gross proceeds and send them to California's tax authorities. Section 7. DISCLOSURE If the building was built prior to 1978, the owner must disclose any known lead-based paint or lead-based paint hazards to the manager. If he has any related records or documents, these must be given to the manager as well. Section 8A COMPENSATION contains a compensation clause in which the owner can specify different compensation amounts for individual duties, such as renting, evictions, and preparing property for rental or sale. These compensation figures may be stated as percentages or flat fees. Section 8B contains a list of duties that are not part of the agreement, such as preparing the property for sale or completing fire or major damage restoration. If the owner wants the manager to perform any tasks that are not included in the management agreement, the parties need to agree on the fee in advance. Section 8C. The manager is allowed to charge tenants fees for returned checks, assigning or subleasing units, processing credit applications, and other services. Section 8D1. The manager can use companies and organizations in which he has an interest to perform maintenance or other property-related services, as long as he discloses his interest to the owner first. Section 8D2. He may accept commissions or fees from these companies or organizations as well. Section 9. In the AGENCY RELATIONSHIP DISCLOSURES section of this agreement, the broker agrees to act as a dual agent for the owner and any tenants. The owner consents to this dual agency arrangement. If the managed property is a 1- to 4-unit residential property for which the management agreement permits tenancies of over one year, the owner must be provided with a copy of the C.A.R. "Disclosure Regarding Agency Relationships" form. Section 10. NOTICES When either party needs to send the other a notice under this agreement, the notice must be sent using first class mail or another method agreed to by the parties. Unless the parties agree otherwise, notice is considered received 3 calendar days after it is mailed. Section 11. DISPUTE RESOLUTION This management agreement contains a dispute resolution clause very similar to the dispute resolution clause found in the C.A.R. purchase agreement form. First, the owner and manager agree to mediate any disputes before turning to arbitration or court action. Next, if they choose, the parties may decide in advance to arbitrate any disputes over the manager's compensation that were not resolved through mediation. To do this, they must initial the arbitration clause and give up their rights to have those disputes litigated in court. Certain issues are exempt from both mediation and arbitration, including any action for personal injury or wrongful death, and any action regarding property defects. The next few clauses in the management agreement are also similar to clauses found in the purchase agreement. Section 12. EQUAL HOUSING OPPORTUNITY First, the parties agree to comply with all federal, state, and local anti-discrimination laws in renting or selling the property. Section 13. ATTORNEY FEES They also agree that the prevailing party in a lawsuit or arbitration will be entitled to attorney's fees and costs. Section 14. ADDITONAL TERMS Space is provided for the parties to write in any additional terms not included in the pre-printed form. Section 15. TIME OF ESSENCE; ENTIRE CONTRACT; CHANGES Finally, the agreement contains an integration clause stating that the management agreement constitutes the entire agreement between the parties and replaces any previous agreements or negotiations. Note that "time is of the essence": any failure to meet a contract deadline will be treated as a breach of contract. Both parties must sign the property management agreement on the last page, and fill in their contact information. The owner needs to include his social security number or tax identification number, for tax reporting purposes.

Marketing: Direct mail

Sometimes a property manager mails out brochures describing property available for lease or rent. This can be effective, as long as the mailing is not simply sent to the general public. Instead, it should be targeted to recipients who are likely to be potential tenants. To make sure the mailing reaches the right people, the property manager must compile or purchase a mailing list of potential tenants for the type of property in question. With a good mailing list and a well-designed brochure, direct mail can work well. Of course, the brochure can also be given to people who visit the property.

Marketing: Radio and TV

Television and radio spots are occasionally used to advertise large commercial or residential properties. While this type of advertising reaches a large number of people, there are likely to be only a few potential renters in the audience. And since broadcast advertising (especially a TV ad) is relatively expensive, it generally isn't a cost-effective way to advertise rental property.

Cash flow

The difference between the income and the expenses involved in an investment. A real estate investment that generates a positive cash flow increases the investor's income.

Equity

The difference between the value of the property and the liens against it. The equity in real estate adds to its owner's net worth. Also, an investor can use the equity in real estate as security for loans, allowing her to generate cash for other purposes.

#3. Management Functions

The functions of a property manager are many and varied, but they can generally be divided into three main categories. These are: -leasing and tenant relations; -record keeping and manager-owner relations; and -property maintenance.

Unlawful detainer action.

The legal eviction process.

Agreement provisions: Tenancy termination

The manager is authorized to give notices to terminate when necessary. She is also authorized to take action to evict tenants, recover property and rents due, and to settle related claims and lawsuits.

Agreement provisions: Advertising and rental agreements

The manager may advertise the property for lease. She can also: -execute, -renew, and -cancel rental agreements. The owner can specify a maximum lease term and a minimum rent amount for those agreements. The manager collects rents and security deposits and provides receipts to the owner.

Market analysis

A market analysis provides the property manager with information about competing properties. This is the last step in the preliminary study for the management plan. This step must come last, because it's only after the manager has analyzed the region, neighborhood, and property that she can define the pertinent market. The major divisions of the real estate market correspond to the property types discussed earlier: residential, commercial, retail, and industrial. Each of these markets is broken down into subcategories. For example, subcategories of the residential market include: -single-family rental homes. They also include: -duplexes, -townhouses, -walk-up apartments, -small multistory apartment buildings, and -large apartment complexes. The property manager identifies the market in which the managed property competes, then evaluates that market. The manager must analyze the following aspects of the market. -The number of units available in the area. -The average age and character of the buildings in which the units are located. -The quality of the average unit in the market (the size, layout, facilities, and condition). -The number of potential tenants in the area. -The current price (rental rate) for the average unit. -The occupancy rate for the average unit. The property manager compares the managed property to comparable properties in the neighborhood to determine what advantages and disadvantages the managed property has. This information is the starting point in developing a management strategy for the property.

Fiduciary

A person who essentially holds the character of trustee. A fiduciary must carry out the duties in a manner which best serves the interest of the party for whom the fiduciary relationship is established. A real estate licensee has a fiduciary duty to his/her client. (Seller, landlord, buyer or tenant)

Return

A profit. A return might be in the form of: -interest, -dividends, or -appreciation in value.

Property Management Agreement: Scope of authority

A property management agreement should always be put into writing and be signed by both the manager and the owner. The agreement should clearly define the scope of the manager's authority, indicating what kinds of decisions the manager can make on his own,... ...and when the manager must consult with the owner before acting. For example, the manager might or might not be allowed to make decisions concerning major repairs, hiring and firing employees, obtaining insurance for the property,... ...or launching an advertising campaign. The manager might or might not have authority to execute leases on behalf of the owner. All of this should be spelled out in the management agreement. *Property Management Agreement The property manager is authorized to: -Make major repairs to the building -Hire & fire employees -Purchase insurance for the property -Advertise on behalf of the property owner -Execute leases on behalf of the owner *Property Management Agreement -Defines scope of manager's authority

Management Functions: Record Keeping and Manager/Owner Relations

A property manager is legally required to account to the property owner for all money received and disbursed in connection with the management of the property. Beyond that requirement, what kind of reports the manager is expected to submit to the owner (and how often) is largely a matter of the owner's preference. Some owners want to be very involved with the management of their property, and they require the manager to submit frequent, detailed operating reports. Others prefer to leave as many decisions as possible up to the manager and are concerned only with results. These owners may want simpler and less frequent reports.

Maintenance: Supervision

A property manager is not expected to be able to perform repairs and other maintenance. Most maintenance is carried out by building maintenance employees, outside maintenance services, or independent contractors. But the manager should know enough about buildings (structural components, wiring, plumbing, and so on) to recognize when maintenance is needed and to supervise the work. When first starting to manage a property, the manager should inventory the physical elements and equipment of the building. The manager should then prepare a schedule of inspections, cleaning, and repairs. For example, the elevators in an apartment building should be serviced on a regular basis, not just when one of them breaks down. The property manager should keep records on when the various elements of the property were inspected, serviced, repaired, or replaced. Regular maintenance is an essential part of good management. It preserves the value of the property and can prevent many major repair costs.

Regional Analysis: General employment levels

A property manager must watch local employment trends. The employment levels in a community determine how many potential residential tenants can afford to rent. A property manager should also be aware of earnings trends (are they increasing or decreasing?) and savings rates (are consumers more inclined to spend their money or save it?).

Property Management Agreement: Manager's compensation

A property manager's compensation may take the form of a standard set fee, a percentage of rents collected, or a combination of the two. In some cases, set fees may be assigned for different duties, such as renting units, handling evictions, preparing units for rental or sale, or managing units during periods of vacancy. The management agreement should state which method of calculating compensation is to be used.

Management plan: Preliminary study: Regional analysis

A regional analysis includes information about the city or metropolitan area in which the property is located. This information includes: -data on trends in occupancy rates, -market rental rates, -general employment levels, and -family size and life-style. When performing a regional analysis, an appraiser will look at certain characteristics of the city or metropolitan area in which the property is located. The property manager is interested in trends in occupancy rates, market rental rates, general employment levels, and for residential property, family size and life-style.

Rent roll

A report on rent collection.

Agreement provisions: Disbursements

The manager pays herself her compensation out of the trust account. After paying operating expenses, she will disburse the property's net income on a specified regular basis to the owner, along with operating statements and receipts. The owner must give the manager all of the information and paperwork needed to manage and operate the property. The owner agrees to release the manager from liability for any costs and claims related to the manager's duties. In subsequent paragraphs, the owner agrees to maintain insurance sufficient to protect both the owner's and the manager's interests. The manager must be specifically named as an insured party on the insurance policies.

Manager/Owner Relations: Statement of operations

A statement of operations is a periodic report showing the total money received and disbursed and the overall condition of the property for a given period. The report typically includes a summary of operations, the rent roll, a statement of disbursements, and a narrative report of operations. In many cases, the manager's report to the owner takes the form of a statement of operations, commonly submitted on a monthly basis. A statement of operations details the money received and the money paid out in connection with the property during the specified period. A statement of operations typically includes the following sections: -a summary of operations (brief description of income and expenses); -the rent roll (a report on rent collection); -a statement of disbursements (list of all expenses paid during report period); and -a narrative report of operations (brief letter explaining other sections).

Variable expense

A variable expense is a property management expense that varies depending on current management needs (such as repair expenses). Variable Expenses: -Utilities -Maintenance -Repairs

Signing a Lease: Additional clauses

A variety of pre-printed lease forms are available, or your broker may have a particular set of forms for you to use. No matter what form you use, the agreement must contain the required provisions we mentioned earlier. And depending on whether the property is residential or commercial, you may want to include additional provisions covering: which utilities are paid by the tenant; any tenant maintenance duties; assignment and subleasing privileges; and restrictions on alterations to the property. *Lease Provisions (required) -parties' names -property description -rent -tenancy term (optional) -tenant-paid utilities -tenant maintenance duties -assignment and subleasing -restrictions on alterations

Agreement provisions: Expense and trust accounts

The manager pays property expenses, taxes, and insurance costs out of owner's funds held by the manager. The owner can specify whether tenant security deposits are given directly to the owner or deposited into the manager's trust account. The manager's trust account must be maintained separately from the brokerage's other accounts. The owner can instruct the manager to maintain a certain amount of reserves in the trust account.

Types of Managed Properties: Residential rental property

Although single-family homes may be rented out, most residential rental properties are apartment buildings. One key characteristic of residential rental properties is their relatively high tenant turnover rate. An apartment lease typically lasts only six months or one year. By contrast, the lease for an industrial property is likely to last ten years or more. Because of the high turnover rate, residential property managers spend more of their time on marketing and leasing activities to find new tenants for vacant units. Residential property managers have to be very familiar with the provisions of the state residential landlord-tenant laws and related local laws. These laws impose a variety of obligations on residential landlords that do not apply to landlords leasing nonresidential property.

Lease Renewals

An automatic renewal clause is a lease provision that ensures automatic renewal of the lease unless the tenant or the landlord gives the other party notice of intent to terminate. Unless the tenant has been troublesome, the property manager would almost always prefer to renew an existing tenant's lease instead of finding a new tenant. Making an existing tenant happy is generally easier and less expensive than preparing the space for a new tenant. Also, by renewing the lease, the manager avoids a period of vacancy (and lost revenue) between the time the old tenant moves out and a new tenant moves in. A property manager should keep track of when a lease will expire and notify the tenant when the lease is about to run out. The manager should then contact the tenant (by phone or in person) to ask if the tenant would like to renew the lease. If so, the manager and the tenant will negotiate the terms of the new lease, and a new document will be executed. A lease may include an automatic renewal clause. If one is included, at the end of the original lease term, the lease will automatically be extended for an additional period unless one party gives the other notice of termination.

Leasing and Tenant Relations: Rent collection

Another important aspect of tenant relations that is handled by a property manager is rent collection. Selecting financially sound and responsible tenants in the first place is the best way to avoid collection problems. A residential manager should check each rental applicant's references and employment information, and contact the applicant's previous landlord, if possible. For a commercial lease, extensive financial information is usually required. How, when, and where the rent is to be paid should be clearly stated in the lease, along with any penalties for late payment. The manager should enforce these policies consistently, keeping careful track of when payments are received. If a tenant's rent is late, the manager should notify the tenant immediately. *Lease Agreement -Rent is payable on the first of the month. -Payments shall be made to 1121 Main Street. -Payments not made within 10 days of the due date are subject to a 5% penalty. No matter how carefully the tenants were screened and how clearly the rent policies were spelled out in the lease, problems occasionally arise. The manager's collection efforts should be polite but firm. If these efforts fail, the manager must be prepared to take legal action to evict the tenant in accordance with the owner's policies. The legal eviction process is called an unlawful detainer action.

Investing in Real Estate: Appreciation

Appreciation is an increase in the value of property due to changes in the economy or other outside factors. In recent years, we've seen that real estate values can fluctuate up and down due to market conditions. However, over an extended period of time, real estate prices generally increase at a rate equal to or higher than the rate of inflation. Thus, real estate is usually an effective hedge against inflation. And as buildable property becomes harder to find, the values of properties in prime locations increase even more. *Real Estate: A hedge against inflation. Appreciation causes a property owner's equity to increase. Equity is the difference between the value of the property and the liens against it. The equity in real estate adds to its owner's net worth. Also, an investor can use the equity in real estate as security for loans, allowing her to generate cash for other purposes.

Leasing and Tenant Relations: Leasing techniques

Attracting potential tenants to the property with effective advertising isn't the end of the story. The property manager must now persuade the prospects that the property is a desirable and affordable place to live, work, or run a business. The property manager tours the property with a prospective tenant and points out its attractive features and advantages. If it's commercial property, they may discuss how the space can be altered to fit the prospect's needs, and what concessions the landlord is willing to offer. If the prospect is still interested after viewing the property, the manager has to decide whether the prospect is a suitable tenant. Financial stability is always key, but there are other important considerations. In the case of a shopping center, for example, the manager must make sure that the prospect's business would complement the other retail tenants in the mall.

Leasing and Tenant Relations: Marketing

The manager tries to advertise the property so as to reach the most potential tenants at the lowest possible cost. A property manager has to decide, based on the nature of the property, what type of advertising, and how much advertising to use. Some properties have no trouble attracting tenants and don't require any advertising. For other properties (such as a property in a highly competitive market, or one in an out-of-the-way location) advertising is essential. Advertising is successful if it attracts a good number of potential tenants quickly, without costing more than it's worth. Property managers often think in terms of a certain number of prospective tenants for advertising dollars spent. For example, a property manager might conclude, based on her experience, that advertising for rental properties should cost no more than $30 to $40 per prospective tenant. So an ad that costs $300 should bring in between 8 and 10 potential tenants. The manager must be familiar with the cost and effectiveness of each different type of advertising. Depending on the type of property and the market in question, the property manager might consider using any of these forms of advertising: -Signs -Internet Ads -Newspaper Ads -Radio/Television -Direct Mail

Investing in Real Estate: Cash flow

Besides appreciating in value, many real estate investments also generate a positive cash flow. This happens if the property generates more income than required to pay the expenses associated with the property. Cash flow is the difference between the income and the expenses involved in an investment. A real estate investment that generates a positive cash flow increases the investor's income.

Property Management Agreement: Basic provisions

Beyond defining the scope of the manager's authority, the agreement should include all of the following: -the term of the agreement; -the manager's compensation; -the type of property; and -the description of the property. Additional provisions which should be included in the management agreement include: -whether the manager is authorized to collect or disburse funds, and if so, for what purposes; -whether the manager is authorized to hold and disburse tenant security deposits; -a description of other management duties, with any exceptions spelled out; -any reports the manager must give the owner (and how frequently); and -how costs will be allocated (who will pay for what).

Summary of operations

Brief description of income and expenses.

Narrative report of operations

Brief letter explaining other sections.

Neighborhood analysis

The neighborhood analysis includes information about the neighborhood where the property is located. This information includes the economic status of the residents, the occupancy rate, whether the population is increasing or decreasing, and how well the properties are maintained. What constitutes a neighborhood varies widely. A neighborhood may be defined by physical boundaries, such as a body of water or a freeway. Or a neighborhood may simply be a certain area in which the properties are similar in value, age, condition, architectural style, or other characteristics. The character of the neighborhood in which a managed property is located has a significant impact on the property's value and use. No matter how well a property is operated, its profitability (its ability to attract users) is determined in part by its location. Location must always be taken into account in developing a management plan. In evaluating the neighborhood, a property manager considers factors such as: -the character of the buildings and amenities of the neighborhood; -the economic status and age groups of the residents or users; -the occupancy rate, and whether the population is increasing or decreasing; and how well the properties are maintained. The property manager should analyze the reasons behind trends (such as an increase in population or a decline in property maintenance). This will enable the manager to take advantage of the trend, or else protect the managed property from it.

The Budget: Net income

The projected operating expenses are subtracted from the estimated income to arrive at the property's net income figure. Property income -Operating expenses =Net income

Property analysis

The property analysis includes information about the property to be managed. This information includes: -the number and size of the living units; -the appearance of the property; -and the physical condition of the building or buildings, including: -the roofs, -walls, -windows, -hallways, -elevators, -lobby, and -so on. Once the property manager understands the property's regional and neighborhood context, he or she studies the property itself. The manager considers every aspect of the property, including all of the following characteristics: -The number and size of the living units, or the number of rentable square feet. -The appearance of the property and its rental spaces, including the age, architectural style, layout, fixtures, and view. -The physical condition of the building or buildings. -The physical condition of the rental spaces. -The facilities and amenities provided, such as restrooms, a laundry, recreational facilities, and parking. -The services provided, such as janitorial or security services. -The relationship between the building and its site. (Is the land used efficiently?) -The current occupancy rate and tenant composition. -The size and effectiveness of the current staff.

#1.2. The Property Management Agreement

The property management agreement creates an agency relationship between the manager and the property owner. It also sets forth the authority of the property manager. The agreement should always be in writing and signed by both the manager and the owner. The type of the managed property affects a property manager's duties. But the terms of the property management agreement have an even greater impact on the daily activities of the manager. The property management agreement establishes the terms of the property manager's employment, creates an agency relationship between the manager and the property owner, and sets forth the authority of the property manager. Note that because the property manager is an agent of the property owner, the property manager is a fiduciary.

Management Functions: Hiring and supervising employees and making purchases

The property manager is usually responsible for hiring, training, and supervising all of the workers on the managed property's premises. These employees may include: -maintenance staff, -gardeners, -construction and -repair workers, -assistant managers, -security personnel, and -any independent contractors. The manager is responsible for employee payroll, and also has the task of developing and enforcing employee policies. Additionally, the property manager is responsible for supervising the purchase of all supplies and services required for the property's operation and maintenance.

Types of Managed Properties

There are basically four types of income-producing properties. They are: 1) residential property, including apartment buildings, condominiums, and co-ops; 2) office buildings; 3) retail property; and 4) industrial property. Property managers often specialize in one type of property. This is because each type of property has its own characteristics, and often requires a special kind of expertise.

Management Functions: Property Maintenance

This means that the manager is responsible for supervising the maintenance of the property. Maintenance activities include: -preventive maintenance, -corrective maintenance, -housekeeping, and -new construction.

Regional Analysis: Residential property: family size and lifestyle

Three-bedroom Home vs. Five-bedroom Home Average family size is an important factor in determining the rental value of particular residential units. For example, if most families in an area consist of two parents and two children, then five-bedroom rentals will be in less demand than three-bedroom rentals. A property manager will be able to charge a higher price per square foot for three-bedroom units than for five-bedroom units. The national trend over the past few years has been toward smaller families and more single-person households. But average family size varies from one community to another, and a property manager should keep track of local trends.

The Budget: Income

To calculate the income that the property can be expected to generate, the manager lists the total value of all of the rentable space, then subtracts an estimated amount for delinquent rents and vacancies (sometimes called a bad debt and vacancy factor). The manager also adds estimated proceeds from any other sources of income (such as parking, laundry, or vending machines).

#2. Management plan

To effectively address the owner's goals in the management plan, the property manager must first study the property itself and its context. This study involves completing four types of analyses: a regional analysis; a neighborhood analysis; a property analysis; and a market analysis.

Regional Analysis: Trends in Occupancy rates

Under the law of supply and demand, when demand for an item is greater than the supply, the value of the item increases. Conversely, when supply exceeds demand, the value of the item decreases. This fundamental economic rule applies to rental properties, just as it does to other commodities. There is a technical oversupply of property when there are more units than potential tenants. When there are enough potential tenants, but not enough who are able to pay the current rent, then it's called an economic oversupply. On the other hand, there may be a technical shortage of units (more potential tenants than units) or an economic shortage of units (more able-to-pay tenants than units). To set rental rates for a managed property, a property manager monitors the trends in occupancy rates for comparable properties in the area. Occupancy rates fluctuate constantly. When the trend is toward higher occupancy, space is becoming scarcer and therefore more valuable. Under those circumstances, a manager is likely to raise rents or reduce services for tenants (or both). On the other hand, if there is a trend toward lower occupancy rates (more vacancies), then it would be unwise to raise rents, and tenants are likely to demand more services when renewing their leases.

Property management

When someone other than the property owner supervises a property's operation, he is acting as a property manager.

#1. Property management

When someone other than the property owner supervises a property's operation, he or she is acting as a property manager. Because many brokerages engage in at least some property management, every real estate agent needs to understand the basic principles of property management. They include the reasons: -people invest in real estate, -the different types of managed properties, -the management agreement, -the management plan, and -management functions.

Economic oversupply

When there are enough potential tenants, but not enough who are able to pay the current rent. An economic oversupply is when there are too few tenants who can potentially afford the available units.

Technical oversupply

When there are more units than potential tenants. Technical oversupply results when there are too few potential tenants for the number of available units.