Chapter 2 Preparing for Management

I. Owner Benefits INCOME CASH FLOW is the cash left over after cash expenses. It is money that any owner can spend. Since cash flow does not deal with non-cash expenses (depreciation), cash flow is greater than net income. Because rents appear higher, gross income shown on the books is more important than cash flow to some owners. SECURITY Historically, real estate has acted as a hedge against inflation. MAINTAINING THE PROPERTY Most owners want their properties maintained to protect their investment. They realize that proper maintenance directly relates to both vacancy factors and rents.

I. Owner Benefits (cont.) DEPRECIATION AND CAPITAL GAINS APPRECIATION PSYCHIC INCOME The prestige that goes with being able to say they own a trophy property. COMBINATION OF BENEFITS The benefits that an owner expects from ownership are likely a combination of benefits listed with greater emphasis on just one or two of them.

II. The Management Plan PROPERTY ANALYSIS Location of the Property The Physical Structure Grounds and Parking Current Tenants Area Analysis Other Possible Uses Photos

II. The Management Plan (cont.) GOALS PRO-FORMA STATEMENT STAFFING COST SAVINGS

II. The Management Plan (cont.) RESERVE REQUIREMENTS ECONOMIC CHANGES MARKETING PLAN MANAGEMENT PLAN PRIOR TO CONSTRUCTION Property management can actually begin prior to construction. For large projects, the leasing start-up and applicable maintenance contracts and staffing decisions should be made prior to completion.

III. Refusing Management SPECIALIZATION UNREALISTIC FEES A property manager is NOT going to remain in business if he or she is NOT adequately compensated In competitive situations where you have shown what you can do, always compete on a professional basis and NOT because of lower prices. SLUMLORDING Don’t accept a management position where an owner wants to milk a property for rents without regard to tenant services. NEGATIVE CASH FLOWS Exists when cash disbursements exceed cash (rental) income, requiring the owner to continue to put more money in the property.

III. Refusing Management (cont.) CODE VIOLATIONS You should avoid getting involved in property that is currently in violation of codes or zoning ordinances unless the owner has shown the ability and willingness to correct any problems. PLAYING SCROOGE OWNERS WANT TO CONTROL To give back a management contract is better than trying to share management duties. You don’t want to get involved in tax fraud. A property manager should avoid involvement with an owner unless an atmosphere of trust and respect exists between them.

IV. The Property Management Contract The PROPERTY MANAGEMENT CONTRACT is the agency agreement between an owner and a property manager and must clearly set forth the obligations of the parties. ARTICLE I Article I of the form clearly states that this is an exclusive agency for managing and leasing described property. ARTICLE II Article II of the form sets forth the term of this management contract.

20

IV. The Property Management Contract (cont.) ARTICLE III Rental Lease Negotiation Advertising Residential property management contracts generally do NOT provide for the owner to pay for advertising costs. Rental Rates Compensation ARTICLE IV Management of Building Repairs The dollar limit can be exceeded in emergencies where repairs are required to protect the building or to maintain tenant services. Service Contracts

IV. The Property Management Contract (cont.) ARTICLE IV Reimbursement Employees The parties can therefore agree as to who will be the employer, the manager or the owner. Expenditures Monthly Statement Collection and Segregation of Funds Bonding of Employees Interest and Tax Payments Special Services Legal Proceedings Compensation

IV. The Property Management Contract (cont.) ARTICLE V Indemnification The manager is NOT relieved of gross negligence or willful misconduct unless covered by owner’s insurance. Compliance with Laws Insurance Waiver of Subrogation ARTICLE VI

IV. The Property Management Contract (cont.) ARTICLE VII Bankruptcy and insolvency Termination would NOT exclude any other remedy available under the law. (Could still sue for damages.) Independent Contractor Notice Suit or Action Assignment of Amendment SCHEDULE I Description of the Property Manager Compensation for Leasing Management Commission Sale Commission The manager need NOT have been a party to the sale to be entitled to this commission. Payments by Manager Employees of Owner

IV. Agency Termination

VI. Takeout Checklists A formal checklist is important or you are almost certain to miss something.

Chapter Summary Owner benefits of rental property include: 1. Income 2. Security 3. Depreciation 4. Capital gains taxation 5. Appreciation 6. Pride of Ownership (psychic income) Management plans When to refuse management opportunities BOMA property management contract Termination of a contract