Property Management Vocabulary

Property Management Terms

• Budget Comparison Statements.
• Cash Flow Report.
• Corrective Maintenance.
• Management Agreement.
• Management Plan.
• Multi Peril Policies.
• Operating Budget.
• Preventative Maintenance.
• Profit and Loss Statement.
• Property Manager.
• Risk Management.
• Routine Maintenance.
• Surety Bonds.
• Tenant Improvement.
• Workers Compensation.

Property Management Defined

• Property management involves leasing, managing, marketing, and overall maintenance of real estate owned by others, usually rental property.
• A real estate license is not required for owners to manage their own properties.
• Most properties are professionally managed.
• Mortgage lenders often require investors to hire professional property managers to ensure rent collection and mortgage repayment.

Licensing Requirements

• In many states, property managers must hold a real estate broker's or property manager's license.
• Real estate associates can only manage property with the consent of their employing broker and in the broker's name.

Role of the Property Manager

• The role is complex, requiring the manager to be a market analyst, salesperson, accountant, advertising specialist, and maintenance person.
• Property managers interact with lawyers, environmental engineers, and account teams.
• Principal responsibilities:
  • Achieve the objectives of property owners.
  • Generate income for the owners.
  • Preserve and/or increase the value of the investment property.
• Accomplishing these goals includes physical property maintenance, finding suitable tenants, collecting rents, and hiring/supervising employees.
• The property manager is responsible for budgeting and controlling expenses, keeping proper accounts, and making periodic reports to the owner.
• The main goal is to operate and maintain the physical property to preserve and enhance the owner's capital investment.
• Property managers may work for property management companies and manage properties for multiple owners under management agreements.

Agency Relationship

• A property manager has a general agency relationship with the property owner.
• They can be an independent contractor with greater authority and discretion.
• A property manager or owner may employ building managers to supervise daily operations.
• General agents (property managers) handle accounting, advertising, maintenance, and rentals, unlike specific agents (real estate agents) who are hired for a specific transaction.

Securing Property Management Business

• Possible clients: corporate owners, apartment buildings, owners of small rental residential properties, HOAs, investment syndicates, trusts, and owners of office buildings.
• A good reputation is the property manager's best advertising.
• Managers should increase property income while meeting legal requirements and enhancing the property's attractiveness to tenants.
• Property managers should ensure that building owners have realistic income expectations based on market rates.
• Necessary maintenance, unexpected repairs, and effective marketing all require time and money.
• Most states have landlord-tenant laws that require the landlord/owner to keep the property repaired and compliant with building codes.
• The property manager becomes responsible for repairs and building conditions through the agency relationship.

New Opportunities for Property Managers

• Community Association Management:
  • Increased prevalence of homeowners and condominium associations.
  • Complex planning and development codes.
  • Requires assisting volunteer boards and often requires a real estate or associate management license.
• Housing for Seniors:
  • Opportunities managing housing for those aged 55 or older, including federally assisted housing programs.
  • Responsibilities include marketing, facility operation, housekeeping, meal service, social event planning, and emergency medical planning.
  • Managers need familiarity with state and federal rules pertaining to eligibility and income verification.
• Manufactured Homes:
  • Homes built in a factory meeting HUD specifications.
  • May be placed on individually owned land, but often in communities.
  • Tenants may rent the pad (land).
  • Managers must build community spirit, especially in senior-geared communities.
• Resort Housing:
  • Managing second homes or resort rentals presents challenges.
  • Must care for and maintain often-vacant properties.
  • Must attract and manage short-term tenants.
  • Properties are often in high-risk areas for natural disasters.
  • Managers must prepare for emergencies and work with insurance adjusters.
• Concierge Services:
  • Training and managing concierge staff for office buildings and other settings.
  • Staff handle tasks from arranging taxi rides to assisting with internet-enabled equipment for conferences.
• Asset Management:
  • Asset managers monitor a portfolio of properties.
  • They analyze property performance and make recommendations to owners.
  • Managers help clients decide what type of real estate to invest in (commercial, residential, industrial, agricultural).
  • They provide advice on which property to purchase, the best financial sources, and when to dispose of it.
• Corporate Property Manager:
  • Allows a corporation to invest in real estate and increase capital even without property management knowledge.
  • Typically an employee of the corporation, not an independent contractor.
• Here is an example of a Leasing Agent.
  • Usually an independent contractor working on commission.
  • Skilled in securing a lessee.
  • Brokerage companies with property management divisions may ask leasing agents to list properties for rent.
  • The process involves listing the property, showing it, and processing applications.
  • The property manager and owner select the tenant.
  • The leasing agent receives a commission.

Professional Organizations

• Property managers have professional organizations for education, license renewal, and continuing education.

Management Agreements

• The first step in taking over property management is entering into a management agreement.
• It's a contract that creates a general agency relationship between the owner and the property manager.
• Defines duties and responsibilities of each party.
• Serves as a guide for operating the property and a reference in case of disputes.
• Property manager is typically considered a general agent.
• As an agent, the property manager has fiduciary responsibilities:
  • Care, Obedience, Accounting, Loyalty, Confidentiality, Disclosure (COLD AC)
• Property managers are empowered to make more decisions than a real estate professional representing a buyer.
• The manager's priority is to realize the highest return on the property, consistent with the owner's instructions and the law.
• The management agreement should be in writing and include:
  • Description of the property.
  • Time period it covers (start and end date).
  • Definition of the property manager's responsibilities.
  • Statement of the owner's purpose and responsibilities.
  • Extent of the manager's authority.
  • Reporting frequency.
  • Compensation to be paid.
  • Allocation of funds for repairs and maintenance.
  • Liability coverage (insurance).
  • Antitrust provisions (no illegal business activities).
  • Equal opportunity statement and fair housing protection.

Property Manager's Responsibilities begin with a Management Plan

• The management plan outlines the owner's objectives, the property manager's expectations, accomplishments, and financial objectives.
• In preparing the plan, the property manager analyzes:
  • The owner's objectives.
  • The regional and neighborhood market.
  • The property itself.
• Occupancy, absorption rates, and new starts are critical.
• The plan includes a budgetary section on sources of revenue and anticipated expenses.
• The management plan is for the present and is forward-looking in determining the feasibility of the property owner's long-term goals.

Financial Reports Required by Property Managers

• Operating Budget:
  • Developed before renting the property.
  • It's a projection of income and expenses over a one-year period.
  • Based on anticipated revenues and expenses.
  • Provides the owner with the amount of expected profit.
  • Used as a guide for the property's financial performance.
  • After managing the property for some time, the operating budget can be developed based on the profit and loss statement.
• Cash Flow Report:
  • Monthly statement detailing the financial status of the property.
  • Sources of income and expenses are noted.
  • Includes the net operating income and the net cash flow.
  • It provides a current financial status snapshot.
    Income:
  • Rentals collected, late rental payments, utility, and vending machine proceeds.
  • Losses from uncollected rental payments or evictions are deducted from total gross income to arrive at the net operating income.
  • Expenses are divided as fixed and variable.

Cash Flow is derived using the following equations:

\text{Total Income} = \text{Rental Income} + \text{Other Income} - \text{Losses}

\text{Net Operating Income} = \text{Total Income} - \text{Operating Expenses}

\text{Cash Flow} = \text{Net Operating Income} - (\text{Mortgage Payment} + \text{Reserves})

• Profit and Loss Statement:
  • A financial picture of income and expenses.
  • Used to determine if the business made money or suffered losses.
  • Can be paid monthly, quarterly, every six months, or annually.
  • Created from the monthly cash flow reports.
  • It does not itemize information.

\text{Net Profit} = \text{Money Received} - (\text{Operating Expenses} + \text{Mortgage Interest})

• Budget Comparison Statement:
  • Compares the projected budget versus actual revenue and expenses.
  • Helps determine if the budget was under, over, or on point.

Renting the Property

• Setting rental rates based on market analysis.
• Conducting a CMA to determine market rents.

Marketing

• Attracting the most reliable tenants to ensure income generation.
• Marketing strategy must consider the property, supply and demand, and the advertising budget.
• All advertising must comply with nondiscrimination laws and fair housing protection classes.

Public Relations

• Maintaining good public relations through community involvement and charitable giving.
• Writing and issuing public service announcements to attract media attention and new tenants.
• Cost-benefit analysis to assess the effectiveness of advertising methods.

Selecting Tenants

• Comply with federal, state, and local fair housing laws in selecting tenants.
• Commercial property managers must be aware of anti-discrimination and equal opportunity laws.
• Ensure premises are suitable for tenants in terms of size, location, and amenities.
• The tenant's business should be compatible with the building and other tenants.
• Managers should ask commercial tenants about potential expansion.

Security Deposits

• Most states have strict requirements for handling security deposits.
• Funds should be placed in a trust or escrow account and not commingled with other funds.

Collecting Rents

• Accept tenants who can financially meet obligations.
• Investigate financial references, check credit bureaus, and interview former landlords.

Commercial Rent Calculation Example

• Commercial rents are normally charged on a cost per square foot per year basis.
• Example:
  • Office space is 30 feet by 50 feet.
  • Area = 30 \times 50 = 1500 \text{ square feet}
  • Monthly rent is 2,500.
  • Yearly rent = 2500 \times 12 = $30,000
  • Cost per square foot per year = \frac{$30,000}{1500} = $20
  • Cost per square foot per month = \frac{$20}{12} = $1.67

Tenant Relations

• Maintaining tenant happiness to reduce turnover.
• Establishing good communication systems with tenants.
• Using an internet site to highlight property features, post updates, and provide news.
• Attending to maintenance and service requests promptly.
• Enforcing building rules consistently and fairly.
• Addressing residents who don't pay rent on time.
• Maintaining good record keeping.

Maintaining the Property

• The primary maintenance objective is to protect the physical integrity of the property over the long term.
• Keeping a property in good condition involves:
  • Preventative maintenance: Regularly scheduled activities such as painting and seasonal servicing to preserve long-term value and integrity.
  • Repair and corrective maintenance: Actual repairs that keep the building's equipment, utilities, and amenities functioning (e.g., fixing a leaky faucet).
  • Routine maintenance: Day-to-day duties such as minor carpentry, plumbing repairs, and upkeep of heating, air conditioning, and landscaping.

Environmental Concerns

• Providing recycling facilities.
• Air quality issues are key concerns in property management and design.

Building-Related Illness and Sick Building Syndrome

• Building-related illness: Clinically diagnosed condition attributed to airborne building contaminants. Symptoms include asthma, hypersensitivity, and allergies.
• Sick building syndrome: More typical in office buildings, with symptoms including fatigue, nausea, dizziness, headache, and sensitivity to odors.
• Increasing ventilation or replacing interior features can solve air quality problems.

Federal Laws that Prohibit Discrimination

• Fair Housing Act.
• Americans with Disabilities Act (ADA).
• Equal Credit Opportunity Act.

Americans with Disabilities Act (ADA)

• Title I: Employers with 15 or more employees must adopt non-discriminatory employment procedures and make reasonable accommodations.
• Title III: Prohibits discrimination in commercial buildings and public accommodations.
• Ensure people with disabilities have full and equal access.
• Reasonably achievable accommodations should be made.
• Existing barriers must be removed when easily accomplished with little difficulty at a reasonable cost.

Risk Management

• Involves answering the question of what happens if something goes wrong.
• Evaluate perils and risks to the property.
• A property manager must decide whether to:
  • Avoid the risk by removing it (e.g., a swimming pool).
  • Control the risk by preparing for emergencies (e.g., installing sprinklers).
  • Transfer the risk by shifting it to an insurance policy.
  • Retain the risk by deciding the chances of an event are too small to justify the expense.
• Risks cannot be ignored and must be addressed.

Types of Insurance

• Tenants need H04 insurance for personal property.
• Property managers insure the building itself.