Now that you’ve made an offer to purchase commercial property and are waiting to close 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 2-3 local companies, each with their own proposition. Your job is to decide which company you will hire. The property manager will be the main point of contact between you, as the owner, and the tenants. His main job is:

  1. Receive and collect rent and other payments from your tenants. This is usually simple until a tenant does not send the rent check. A good property manager will somehow get the tenant to pay rent, while a lousy one will throw a monkey on your back!
  2. Hire, pay, and supervise staff to maintain, repair, and operate the property, for example, garbage removal, window cleaning, and landscaping. Otherwise, the property loses its appeal and customers may not patronize their tenants’ businesses. Tenants then cannot renew their lease. As a consequence, you may not get the expected cash flow.
  3. Lease any vacant space.
  4. Keep accurate records of income and expenses, and provide you with a monthly report.

A good property manager is critical to keeping your property fully occupied with the highest market rent, happy tenants, and in turn helping you achieve your investment goals. Before choosing a property management company, you may want to:

  1. Interview the company focusing on how the company handles and solves problems, for example late payments.
  2. Talk to the person who will be managing the property on a day-to-day basis, as this may be a different person than the one who signs the property management contract. You want someone with strong interpersonal skills to effectively deal 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 will require the owner’s approval.

Agent Compensation: you will have to pay someone to manage and rent the property. You may have one company to manage the property and a different company to lease the property. However, it is better to work with a company that handles both management and leasing to save time and money.

  1. Management fee: the fee ranges from 3-6% of a mall’s base monthly rent, depending on the amount of work required to manage the property. For example, it takes much less time to run a $2 million strip mall with a single tenant than a $2 million strip mall 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.
  2. Late Fee: When a tenant pays late, they are often required by the lease to pay a late fee. The property manager may keep this fee as an incentive to collect rent.
  3. Lease rate: this fee compensates the property manager for leasing any vacant space. In a typical lease, the leasing company wants between 4% and 7% of the gross rent over the life of the lease. You also want the rental fee to be paid when the new tenant moves in. 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 Credit (TI), usually between $10 and $20 per square foot to pay for construction expenses. So if a new tenant with a 10-year lease goes under after one year, he may lose money. As an owner you must:
  • Approve a long-term lease (10 years or more) only when the financial strength of the tenant is strong. 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), i.e. inflation that is 3-4% per year rather than a Lowest fixed annual increase of 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 the tenant needs you more.
  • Negotiate a flat renewal fee, for example, $500 instead of paying a percentage of rent over the life of the lease. Negotiation is easier with a company that handles both the lease and the administration.
  • Negotiate to pay the leasing agent a lower percentage, for example 4% when no outside leasing agent is involved.

You can see that it is very important to minimize the rate of tenant turnover 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: Every month, the property manager must send you a report on the income received, the expenses incurred and the condition of the property. You should review the report to see if the numbers make sense. Should:

  1. Request a report showing both rent and CAM fees received.
  2. Request a separate bank account for your property and have a monthly bank statement sent to you. Without this, the property manager will deposit and combine all rents from all the properties you manage into your business bank account.

If you instruct the property manager to send you 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 owner to owner, as well as the type of property. However, it is normally between $500 and $2,000 dollars.

Communication with Property Manager: In the first few months, you and the new property manager should communicate often to make sure things are running smoothly. You must give instructions in writing, such as by email, to your property manager and keep a record of all your correspondence. If the property manager doesn’t do what you’re told, 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 needs to be a good property manager.

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