Vantage Property Management

Why Do I Need a Property Manager?

 Written by Reggan Scrivner on September 22, 2014.

You have just bought your first commercial property.  Congratulations you are now the landlord of a multi-tenant commercial building.  What do you do now?  Do you self-manage? Do you hire a property management company?  A good property management company is much more valuable than the fee they are paid each month.  They are the liaison between tenant and landlord.  They are a buffer between an angry tenant with an emergency in the middle night and the landlord who prefers not to be awoken at 2:00 am.  Property management is much more than pacifying difficult or persistent tenants, they are a TEAM.  A good property management team should have a minimum of an accounting department, marketing department, communications department, property manager, broker, and an assistant property manager. Property management manages your asset, collects from tenants, creates property and tenant budgets, assesses property liability risk, site management, lease administration, tenant retention, tenant screening, vendor maintenance, expense minimization, marketing your tenants businesses, marketing vacancies, brokerage, CAM Reconciliations, and so much more. They do all this so the landlord can enjoy the ease of “out of sight out of mind” experience. 

Ask yourself “Am I ready to provide full financial services for this property?” If you are ready to self-manage here are some helpful tips.

RENT

Proper accounting software will help in preparing for the financial and administrative process of commercial property management accounting.  QuickBooks will not be sufficient.  Property management software can automatically generate rent increases and prorate for respective months.  This will prevent undercharging the tenants.  For example:  The tenants base rent is $4,000 monthly.  The rent increase on 9/8/15 is $4,100 monthly.  September’s rent calculation would be ((Base rent/days in month)*days at that price) + ((Increased monthly rent/days in month)*days at that price) or ((4000/30)*7) + ((4100/30)*23) =$4,076.67. Property management software remembers each tenants rent increases years away.  This leaves less room for human error. Property management software can automatically generate late fees, print three-day notices, track tenant insurance expirations, and create rent rolls, delinquency reports, and budget comparisons.

Once the rent is calculated a decision needs to be decided on how to collect.  The property management firm will record and collect rent and additional rent on behalf of the landlord.  Offering tenants options of direct deposit, checks, cashier checks, and money orders as forms of payment. Most banks offer options for remotely depositing checks.  Depositing checks without driving to the bank will save time and gas.  Cash is typically not accepted as large amounts of cash on hand can be a liability.  Late fee policies are important to a successful commercial property. Rent and additional rent should be paid on time for adequate funds to be available for necessary expenses.  It is important that the tenants understand the late fee policies.  Most leases provide for a grace period of 5 days with a 10% late fee on rent and additional rent.  This is a significant charge and deterrent to tenants who repetitively pay late.  Make sure to check the lease before charging a late fee.

COMMON AREA MAINTENANCE (CAM)

Managing Common Area Maintenance (CAM) charges is time consuming.  CAM is the expenses to manage and maintain a commercial property.  Property tax, insurance, and general repairs are the most common CAM charges.  Managing commercial property differs from residential property.  Most commercial tenants depending on their lease, reimburse the landlord for the Prorata share of all CAM.  For most tenants this includes reimbursing the landlord for third party property management.  That is right; it is possible to have NO OUT OF POCKET PROPERTY MANAGEMENT FEES.  At the end of each year a CAM budget is made for each tenant for the following year.  The CAM Budget will decide the monthly amount each tenant will pay monthly in addition to the base rent.  Corporate tenants will require maintenance contracts, vendor insurance records, request three bids for large projects, pictures for proposed repairs, understand exclusions in corporate leases, and require a high level of detail and explanations for any increases from previous year CAM.  Corporate approval to a new CAM budget is challenging, experience is favorable to this process.  In the beginning of each year you will need to calculate a CAM Reconciliation.  A CAM Reconciliation takes into consideration the tenants payments into the CAM escrow and compares them to the actual expenses paid in the prior year.  If an expense is more than the CAM payments then the tenants will be charged for the difference.  If expenses were less than tenant payments, the tenant will be owed a credit usually taken as a deduction from monthly rent depending on leasing provisions.

CASH FLOW AND CAPITAL EXPENDITURE (CAPEX)

Managing the cash flow of an asset is imperative.  Cash flow is more than rents collected.  Cash flow is reserves, financial planning, and asset managing.  Managing your cash flow adequately will give you the advantage when unforeseen circumstances arise.

A Capital Expenditure (CAPEX) is a newly purchased asset that improves or extends life of an asset.  Roof replacement is a great example of a capital expenditure.  Roof replacement is costly and neither the landlord nor tenants should be expected to pay for a roof replacement without proper planning.  If a commercial property’s roof has reached its full useful life capacity and needs replacement immediately this large lump sum cost could cause the owner to default or loose the property if reserves are not in place.  Reserves and planning play a key role in capital expenditure success.  When the first problem occurs with the roof the questions should be asked

1. What is the useful life of the roof? How long will the roof last?

2. If repairs are done now will that extend the life of the roof and for how long?

3. What is the estimated annual roof maintenance until the roof will need to be replaced?

4. What will be the estimated roof replacement cost as the end of the life cycle?

5. Can this cost be recaptured through CAM?

Once these questions are answered you should prepare capital expenditure budget to prepare for this expense. 

For example; the roof will last five more years at which time it will cost $250,000 to replace.    You know you can earn 5% interest on the money set aside.  How much do you need to put away each year?

The present value is $195,881.54 or you could put away annual payments of $45,243.70 into the reserve account.

 The other solution is to seek out a plan before there is a problem.  Have the roof inspected before it starts to leak and ask the same questions.  If your tenant leases permit you can create a roof reserve. For example; the cycle life of the roof is 10 years and you know the present value of the roof replacement.  You can amortize that cost over 5, 7, 10, or 15 years to the tenants.  Calculate in for inflation.  This is beneficial on many levels.  The tenant experiences a minimal roof reserve charge monthly and the landlord does not have any upfront cost.

This is just one small fragment in managing commercial property.  Get familiar with the Generally Accepted Accounting Principles (GAAP) before undertaking any property accounting.  The most important advice I have is review the leases.  Know what you can and cannot recapture from your tenants. 

WHY YOU NEED A PROPERTY MANAGEMENT TEAM

A property management TEAM maintains your investment so you can enjoy the financial benefits without the hassle.  Taking on the task of self-managing a commercial property can be overwhelming.  It takes more than a property manager to manage a property, it takes a TEAM.  If you’re considering hiring a commercial property management company make sure they have the skills, team, experience, license, and credentials to protect your asset.  Management fees, depending on the lease, can be recaptured through CAM from the tenant.