What should be included in your property management agreement
The key to a successful management agreement is simplicity.
Much like a lease agreement, the first page of a property management agreement should summarize the information about the owners, the property manager and the property. The owner’s information should include back- up contact since as the owner’s representative you’re not always available. You could be traveling, you could be ill, or you could just not be available.
Key property information is really important, as well as the address of the property, the number of units or square footage, the kind of property, the management start date, minimum account balances, client codes, property codes and tax ID numbers are all minimal information that should be reflected on the first page of a management agreement. The easier it is to dig out the simpler it is for everybody setting up in your software.
Once you’ve established the important key information and contact phone numbers and addresses you need to think about the terms of the agreement and the responsibilities of both the owner and the property manager. Clearly the manager is responsible for inspecting the property, leasing and marketing the property and organizing repairs and collecting rents. All these chores need to be addressed and authorized in writing. The property manager needs to be able to hire vendors. You also need to spell out how much a property manager can spend without owners’ authorization.
Depending on the nature of your agreement with your client you may be authorized to sign either rental agreements or leases with tenants, as an agent for the owner. From a residential standpoint this is normal as far as having on site managers and site office personnel signing rental agreements when they represent a client or the property management company. Commercial transactions are typically longer term and for bigger dollar amounts and more often than not property managers prefer not to sign these and have owners sign them instead.
One new concept to consider is the concept of property and staff security and offering this security as part of a property management package. Most property managers typically don’t want to offer security but in some situations for example, if your property is located in a difficult part of town security needs to be hired to protect the property and the tenants. Additionally, language needs to be inserted in the management agreement that waives liability for the property manager when security is offered.
Property owners hire property managers in order to ensure they are compliant with local, state and federal laws. The owner’s goal is to make sure that the property manager is well versed in the local laws to protect ownership, not necessarily from litigation but from unnecessarily making a decision that could create a liability for the owner.
All funds should be kept in trust accounts and the manager has the responsibility to make sure funds are collected from tenants and bills are paid of course. Depending on the state, deposits need to be placed in a security deposit trust account, operating funds can be held in an operating fund and potentially reserve funds can be held in a reserve account that is interest bearing. It’s usually called out in the management agreement if interest is accrued to the Property Owner or Property Manager.
It’s All About the Money
Clearly owners should have to have enough money in their accounts for bills to be paid by the property manager. Property managers will not advance funds for Owners. Some management companies keep it pretty simple by not paying mortgages, insurance or any bills that are not maintenance related. Their financial reports are of a very limited variety. Other management companies prepare full financial reports that make it easy for an owner to just turn over their reports to their CPA at the end of the year for preparation of tax returns.
Owner distributions are sent to owners either at the end of the month, the 10th of the month or the 15th of the month. It all depends on the procedures developed at the property manager’s level. Financial reports should be sent out to owners monthly with all the relative information and detail and of course the property manager has to keep the details for up to 7 years. In case of an IRS audit. Copies of bills can be shared electronically with owners.
Typically, managers will notify you when there’s a problem with the property so you can make an intelligent decision on how to handle it. Owners also need to maintain an honest and ethical approach to handling tenants; the manager is not going to risk their license for one owner. Some management agreements address owner liability and indemnity and manager liability and indemnity. It’s really up to your attorney to help draft this language and navigate it for you.
Insurance wise owners tend to be required to carry liability insurance to cover both the property and the property manager liability at the $2,000,000 level or more depending on the size of the property. The manager typically is named as the additional insured and a certificate of insurance is delivered to the manager with the inception of the management agreement. The manager typically carries the workers’ compensation insurance that covers both on-site employees and off-site employees. If the employees work at a site specifically that belongs to an owner, the owner will end up reimbursing the manager for the cost of workers compensation insurance.
Managers will want to protect their staff from being poached. In other words, managers don’t want their staff to be hired away from them and there is typically non-solicitation language in the agreement to make it difficult to hire an employee. Rarely an Owner might consider canceling the management agreement and try to hire an employee that is exceptionally capable because they want to save money. This is something that a property manager is going to discourage in a significantly aggressive way.
Managers will require ownership to create a system so there’s one point of contact so that decisions are consistent, and the manager has clear direction. There will be language in the management agreement that talks about mediation and arbitration to solve problems at the least for the least amount of money to protect the manager and the client Communication can be handled in many ways both with letters, telephones and e-mail. It’s critical to have a clearly defined path of communication that can be reviewed historically to make sure that everybody’s on the same page once a decision has been made.
Compensation
This is always the trickiest part of the management agreement. Property management fees are usually quoted as a percentage of the collectible income as in gross income though often property managers and owners may also agree on a minimum or fixed price form of compensation. From a residential standpoint you may often see a lease up fee between a half month rent or a month’s rent charged, and you may also see a renewal fee of some kind. There’s usually a definition of who retains the late fees, the NSF fees and screening fees, or any other fees. Sometimes there’s a setup fee equal to one month’s rent and there may be an administrative fee to offset a specific cost structure for a particular property.
On-site staff may be marked up for the time and effort it takes to do all the payroll processing. Depending on the property manager, master insurance policies might be available to a client. Additionally, some property managers offer collection services and mortgage services with a focus on refinancing a property. They usually collect some remuneration for the efforts of putting these into place. Sometimes there are special services that are that need to be authorized as well. These special services could be special accounting services, court attendance, processing evictions, managing insurance claims, or acting as a property consultant.
It’s also not unusual for a property manager to charge between 5 to 10% of a construction project in a project coordination fee structure. Typically, these projects are over a base amount of let’s say $10,000 and focus on the amount of time that a property manager has to spend working with all the vendors to coordinate the construction of a structural component of a building though may also include landscaping and asphalt repairs as well.
Summary
From the standpoint of fairness, a management agreement should be drafted in a way that is simple and clear. Owners and Property managers can decide to negotiate the term of the agreement up front once the property manager has developed his standard language and presented it to the owner. Most agreements have a minimum term of a one year with some sort of cancellation language and penalty in case the property sells in the first year. Most importantly, a client and a property manager should not agree to a management agreement if they don’t agree on basic operating policies that will have been discussed during an interview process. The management agreement is simply the definition of the rules of the road that both sides agree to formalize a mutual understanding.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909, Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
