Chapter 10 Property Management

Contract Basics: Responsibilities

landlord (by way of the property manager), is expected to deliver a property that is habitable landlord must: -keep the heating, cooling, electrical, and plumbing systems in good working condition -keep floors, stairways and railings safe and in good repair -provide pest control as needed -repair roof leaks and broken windows promptly

Contract Basics: Owner's responsibilities

management fees, plus any management expenses such as payroll, advertising and insurance that the manager will not be expected to pay

Contract Basics: Rights, duties, liabilities

manager and the landlord have rights, duties and liabilities under the terms of the management contract

Controlling vacancies

many possible reasons for vacancies in a building: rent too high or too low ineffective marketing management quality poor tenant retention programimage and appearance problems high market vacancy rate

Contract Basics: Owner's purpose

maximize net income, maximize asset value, maximize return, minimize expenditure, maintain property quality, etc.; long term goals for the property

Depreciated value

original value minus the loss in value over time.

Contract Basics: Names of the parties

owner, landlord, manager, tenant or other party to be bound by the contract

The Americans with Disabilities Act

requires landlords in certain circumstances to make housing and facilities available to disabled persons without hindrance.

Contact Basics: Property description

street address, unit number and location, square footage, and other information that specifies the leased premises

Contract Basics: Tenant rights and responsibilities

tenant may be able to take any of the following actions if a landlord fails to correct a problem that is the landlord's responsibility: -move out without liability for back rent or the unexpired portion of the lease -refer the problem to mediation, arbitration or small claims court, after giving the owner written notification of an emergency situation -call a professional repair person and deduct the cost from the next month's rent

Contract Basics: Compensation

the management fee or other means of compensation to the manager: >there may be a flat fee based on square footage >a rental commission based on a percentage of annual rent, a combination of these, or some other arrangement >in compliance with anti trust laws >management fees are not standardized but must be negotiated by agent and principal

Contract Basics: Manager's authority

the scope of powers being conveyed to the manager: hiring and staffing, setting rents, contracting with vendors, ordering repairs, limits on expenditures without seeking owner permission

Variable expenses

those that may change from month to month or occur sporadically, such as specific repairs or capital expenditures

Fixed expenses

those that remain constant and may include operating expenses, regular maintenance costs, and administration

Contract Basics: Term

time period (months, years) covered by the contract; termination conditions and provisions

individual property manager

usually a real estate broker who manages properties for one or more owners; may belong to a small property management firm devoted to full time property management, be self employed, or be one of several managers in a large real estate firm.

individual building manager

usually manages a single large property; may be employed by a property manager or directly by an owner; may or may not have a real estate license.

Corrective maintenance

when routine and preventive maintenance fail, repairs and replacements become mandatory to keep the property operational Example: A boiler may develop a leak, an air‑conditioning unit may break down, an elevator may cease to function properly

Contract Basics: Allocation of costs

who is to pay certain expenses, which will be treated as expenses of the manager vs. which will be paid directly by the owner

Contract Basics: Rights

landlord retains a right of entry into the premises in order to perform needed repairs and maintenance on a property lease and/or the law may specify that a landlord may enter the tenant's property only under one or more of the following conditions: -emergency requires the landlord to enter -tenant gives consent to enter -landlord enters during normal business hours and only after giving notice to either make repairs, or to show the property to prospective tenants, purchasers or contractors -tenant has abandoned or surrendered the property -landlord has a court order allowing the entry landlord has the right to expect prompt payment of rent and adherence to building rules

resident manager (residential properties only)

lives on the property and may be employed by a real estate broker, a managing agent or an owner to manage a property on a part time or full time basis; may be required by state law for properties of certain types and sizes.

Fair Housing, ADA, and ECOA

-ensure that persons receive fair treatment regardless of race, color, religion, national origin, sex, handicap, or familial status -families with children must receive equal treatment with those who do not have children -Landlords cannot charge higher rents or security deposits because of the presence of children -Managers must make sure that their marketing and leasing practices are in accordance with fair housing laws.

Setting rents

-Rental income must be sufficient to cover fixed expenses, operating expenses, and desired return on investment. -rates must be realistic, taking into account what is happening in the market -Managers must consider prevailing rents in comparable properties as well as vacancy rates in the market and in the property. Managers make a detailed survey of competitive space and makes adjustments for differences between the subject property and competing properties before setting the rental rates for the property -Residential apartment rates are stated in monthly amounts per unit, while commercial rates are usually stated as an annual or monthly amount per square foot.

Routine maintenance

-activities necessary for the day‑to‑day functioning of the property. -regular performance helps to keep tenants satisfied as well as forestall serious problems requiring repair or correction -routine activities: regular inspections, scheduled upkeep of mechanical systems, heating, air‑conditioning, rest rooms, lighting, landscaping, regular cleaning of common areas, minor repairs, supervision of purchasing

Contract Basics: Budget

-amounts, or percentages of revenues, allotted for operations, taxes, insurance, capital expenditures, etc.

Contract Basics: Manager

-depending on authority granted by agreement, manager may have right to hire and fire, enter into contracts, and perform routine management tasks without interference from owner -manager has the duties described earlier: to maintain financial records and make reports; to budget; to find, retain, and collect from tenants; to maintain and secure the property; to meet the owner's objectives -manager's liabilities include consequences of mishandling trust funds, violating fiduciary responsibilities, and violating fair housing laws, credit laws, and employment laws

Maintenance contracting

-depending on building type and size, tenant needs, and budgetary constraints -a manager may decide to hire an outside firm to handle maintenance services rather than hiring on‑site employees -efficiency, competence, responsiveness, and effective cost will be major deciding factors

Capital expenditures

Expected expenditures for major items such as renovation or expansion should be included as a budgeting item Large scale projects are typically budgeted over a period of years.

Insurance

- allows for the shifting of liability away from the owner -insurance audit by a competent insurance agent will indicate what kind of and how much coverage is advisable -owners may opt for a multi peril policy which combines standard types of commercial policies and may allow special coverage for floods, earthquakes, and terrorism -amount of coverage may be based on rather property is insured at depreciated value or current replacement value

Tenant improvements

-Alterations made specifically for certain tenants are called build outs/tenant improvements, work may involve merely painting and re carpeting a rental space, installing special electrical or other systems -Some new spaces are often left incomplete so that they can be finished to an individual tenant's specifications, meaning, it is important to clarify which improvements will be considered tenant property (trade fixtures) and which will belong to the building.

Reporting

-Financial reporting to the principal is a fundamental responsibility of the property manager -Reports may be required monthly, quarterly, and annually -Required reports typically include an annual operating budget; monthly cash flow; reports indicating income, expenses, net operating income, and net cash flow; profit and loss statements based on the cash flow reports and showing net profit; and budget comparison statements showing how actual results match the original budget

Contarct Basics: Landlord rights

-landlord has the right to receive rent according to the agreement, and to receive the premises in the specified condition at the end of the agreement term -landlord and his or her agents may have the right to enter and inspect the premises, examine the books, hire and fire staff, and choose vendors -landlord may retain or grant the power to enter into contracts, to set rents, and to select tenants -landlord will have the right to terminate the management contract according to the terms of the contract -landlord will have the duty to pay the agreed management fee, and to make other such payments as detailed in the agreement. -As owner, landlord is liable for failures to comply with local, state, and federal laws, particularly the Environmental Protection Act and fair housing laws

Contract Basics: Reversionary rights of owners

-lease grants a number of rights to property, including, primarily, rights to enter, possess, and use property for the term of the lease -lessee does not enjoy the full bundle of rights to the property. (Example, the lessee may not encumber or sell the property, when the lease expires all rights revert to the original owner. A common example is the leasing of an apartment for a one year period.

constructive eviction

-occurs when a tenant vacates the leased premises and declares the lease void, claiming that landlord's actions have made the premises unfit for the purpose described in the lease. -tenant must prove that it was landlord's actions that were responsible and may be able to recover damages

Physical maintenance

-one of the property manager's primary functions -costs of services provided must always be balanced with financial objectives and the need to satisfy tenant needs -manager will also be concerned with staffing and scheduling requirements, in accordance with maintenance objectives

Budgeting

-operating budget based on expected expenses and revenues is a necessity for management -budget will determine rental rates, amounts available for capital expenditures, required reserve funds, salaries and wages of employees, amounts to be paid for property taxes and insurance premiums and mortgage or debt service Budget will indicate the expected return, based on the previous year's performance -Typical budgets contain a projection, also based on past performance and on current market information, of income from all sources, such as rents and other services, and of expenses for all purposes, such as operating expenses, maintenance services, utilities, taxes, and capital expenditures -Operating statements itemizing income and expenses are presented to owner on regular basis so that the owner can evaluate the manager's performance against the budget

Marketing

-plan based on the property's features and the relationship between supply and demand in the market area, and consonant with the money available, will determine the best mix of advertising and promotional activities. -The efficiency of marketing activities can be judged in terms of how many prospects per completed lease they generate. The lower the cost per prospect per lease, the more effective and efficient the program.

actual eviction

-procedure prescribed in state law and lease contract 1. landlord must serve notice on the tenant a specified number of days before beginning the eviction suit 2. A court issues a judgment for possession, which requires the tenant to vacate 3. A court officer, such as a sheriff, may forcibly remove the tenant and possessions if the tenant refuses to vacate 4. landlord can then enter and take possession

The Equal Credit Opportunity Act

-prohibits discrimination in lending and applies to how property managers evaluate potential tenants. -manager must be consistent in evaluating the creditworthiness of applicants. -same application forms and the same credit requirements should be used with all applicants.

Environmental concerns

-ranges from air quality to waste disposal, tenant concerns, -managed property may contain asbestos, radon, mold, lead, and other problematic substances -Tenants may produce hazardous waste -managers must be aware of the issues and see that proper procedures are in place to deal with them, including providing means for proper disposal of hazardous materials, arranging for environmental audits and undertaking possible remediation -Example: an audit may show that a building is causing tenants to become sick because of off gassing from construction materials combined with a lack of ventilation. Remediation may consist of nothing more than replacing carpets and improving ventilation

The Americans with Disabilities Act

-requires managers to ensure disabled employees and members of public have same level of access to facilities as is provided for those who are not disabled -employers with at least fifteen employees must follow nondiscriminatory employment and hiring practices -reasonable accommodations must be made to enable disabled employees to perform essential functions of their jobs -modifications may be necessary to provide required access to tenants and customers, such as widening doorways, changing door hardware, changing how doors open, installing ramps, lowering wall mounted telephones and keypads, supplying Braille signage, and providing auditory signals -existing barriers must be removed when removal is "readily achievable," when cost is not prohibitive -new construction and remodeling must meet a higher standard

Contract Basics: Manager's responsibilities

-specification of duties, such as marketing, leasing, maintenance, budgeting, reporting, collecting and handling rents -the manager should be included as an additional insured on the liability policy for the property

Contract Basics: Equal opportunity statement

-the HUD statement or equivalent concerning availability to all persons and classes protected by law -incorporated into the agreement in the case of a residential property

Current replacement value

-the amount it would cost to rebuild or replace the property at current rates -more expensive

Maintenance objectives

-to preserve the value of the physical asset for the owner over the long term -Three general types of maintenance are required to keep a property in serviceable condition: >routine >preventive >corrective

Income

-total of scheduled rents plus revenues from such sources as vending services, storage charges, late fees, utilities, and contracts is the potential gross income -subtracting losses caused by uncollected rents, vacancies and evictions gives effective gross income -operating expenses are subtracted from this total to show net operating income when debt service and reserves (which are not counted as operating expenses) are subtracted, the result is cash flow.

Contract Basics: Landlord rights and responsibilities

State law, often incorporating or modeling the Universal Residential Landlord Tenant Act (see below) prescribes rights and responsibilities for residential landlords and tenants.

management agreement

establishes agency agreement between manager and owner as well as specifying such essentials as the manager's scope of authority, responsibilities, objectives, compensation, and the term of the agreement. -agency relationship creates the fiduciary duties of obedience, care, loyalty, accounting, and disclosure -contractual relationship ensures that the manager will strive to realize the highest return for the owner consistent with the owner's objectives and instructions

contents and personal property coverage

for building contents and personal property when they are not actually on the building premises

fire and hazard coverage

for damage to the property by fire, wind, hail, smoke, civil disturbance

flood coverage

for damages caused by heavy rains, snow, drainage failures, and failed public infrastructures such as dams and levies; flood insurance is not included in regular hazard policies

liability coverage

for risks incurred by owner when the public enters the building; medical expenses resulting from owner negligence or other causes

casualty coverage

for specific risks, such as theft, vandalism, burglary, illness and accident, machinery damage

Renovations

When buildings lose functionality (become functionally obsolescent), they generally also lose tenants, drop in class, and suffer declining rental rates. Maintenance becomes more expensive because of the difficulties of servicing out of date building components. Renovation may solve some of these problems, but the manager will have to help the owner determine whether the costs of renovation can be recovered by increased revenues resulting from the renovation.

consequential loss, use, and occupancy coverage

for the business losses resulting from a disaster, such as loss of rent and other revenue, when the property cannot be used for business

Preventive maintenance

goes beyond the routine in attempting to deal with situations that can become serious problems if ignored Examples: seasonal or scheduled replacement of appliances and equipment, regular painting of exterior and interior areas, planned replacement of a roof, etc.

worker's compensation

hospital and medical coverage for employees injured in the course of employment

Contract Basics: Reporting

how often and what kind of reports are to be made

Cash reserve

a fund set aside from operating revenues for variable expenses, such as supplies, redecorating, and repairs. The amount ofthe reserve is based on experience with variable expenses in previous years

Contract Basics: Graduated Lease

a gross or a net lease may also be a graduated lease, in which the rental rate increases at specified times over the lease term

Risk management strategies

avoidance- removing the source of the risk, such as by closing off a dangerous area of the building reduction- taking action to forestall the event before it happens, such as by installing fire alarms, sprinklers, and security systems transference- shifting the risk to someone else by buying an insurance policy retention- taking the chance that the event is not likely enough to occur to justify the expense of one of the other strategies; self insurance Security and safety- standard life safety and security systems: sprinklers, fire doors, smoke alarms, fire escapes, and door locks; manager may have to provide electronic and human monitoring systems (security cameras, security guards) and be prepared to take action against tenants who allow, conduct or contribute to dangerous criminal activities

Tenant Responsibilities

by state law, tenant generally must: -rent on time -Follow the rules and regulations set out by the landlord -Give a 30 day notice when terminating a month to month lease -Return all door and mailbox keys when leaving the property -Leave the unit in as clean a condition as it was at the start of the lease -Keep the unit clean and sanitary -Dispose of all rubbish, garbage and other waste in a sanitary manner; Use and operate all electrical; gas and plumbing fixtures properly -Refrain from destroying or damaging the property -Prevent others from destroying or damaging the property -Use the property and the rooms only for their intended purposes

surety bond

coverage against losses resulting from criminal or negligent acts of an employee

Commercial policies

include coinsurance clauses requiring the insured to bear a portion of the loss (Fire and hazard policies usually require the coverage to be in an amount equal to at least 80 percent of the replacement value) -owner's policies do not cover what is owned by tenant