1. Enhancing Value through Ongoing Management
Chapter 21:
Enhancing Value through Ongoing Management
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2. Why is Management So Important?
Making good property acquisition & development decisions is important because they cannot be undone easily or costlessly
But what about after a property is acquired?
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3. Why is Management so Important?
Ownership of RE puts investors in business of providing rental services—which is extremely management intensive
Owners-or their agents-must repeatedly make management decisions that affect the value of property & investors’ return on equity
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4. Compare to Public Stock & Bond Markets
Unlike many publicly traded stock & bond investments, the going-in & going-out transaction costs of commercial RE investments are high
Thus, investor IRRs are usually maximized by holding assets for longer periods
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5. Compare to Public Stock & Bond Markets
Also, the majority of RE return come from periodic net rental income, not from price appreciation
Thus……
commercial RE returns are significantly affected by how well the ongoing asset managment function is performed
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6. Two Categories of Management Decisions
Those that deal with day-to-day rental operations
i.e. “property” management
Those that deal with the physical, financial, or ownership structure
i.e. “asset” management
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7. Functions of a Property Manager
Marketing the property
Leases are perishable assets that must be replenished
Who should market/lease available space
Apartment properties?
Office buildings & shopping centers?
Independent broker
In-house leasing agent
Property manager
Independent licensed sales associates (working for a licensed broker) usually paid on a commission basis
Commissions typically equal a % of the face amount of lease
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8. Functions of a Property Manager
Selecting tenants
Importance of “willingness & ability to pay”
“Credit” tenants
Tenants (corporations) with an investment grade rating
Vast majority of potential tenants are not credit tenants
Tenant mix
Signing leases
Collecting rent
Property expenses paid out of rental income
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9. Functions of a Property Manager
Repairing & maintaining property
Objective?
Maximization of market value
Comprehensive maintenance program
Importance of being proactive
Aids tenant relations
Maintenance as an investment decision
PV of benefits versus cost
Qualitative vs. quantitative decisions
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10. Functions of a Property Manager
Communicating with owners
Maintaining tenant relations
Complying with landlord-tenant laws
Designed primarily to protect households renting apartments & other residential properties
Governed by state law
Attempt to level the playing field between owners & renters
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11. All States Have Landlord/Tenant Laws Designed to Protect Tenants
Establishes a
more equitable relationship
between residential landlords and tenants
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12. Landlord & Tenant Relations
Landlord’s obligation to make repairs
Tenant’s obligation to preserve the premises
Landlord’s right
to inspect
Landlord’s right
of entry
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13. Landlord’s Access to Unit
Landlords may enter a premises to:
Reasonable notice
Make repairs
Inspect
Show the unit
12-hour lead time
7:30am– 8:00pm
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14. Notice is not required for emergencies
Emergency Access
Notice is not required for emergencies
Smoke/fire
Water leak
Security system
Storm damage
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15. Property Management Agreements
Exhibit 21-2
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16. Agency Relationship Management contract creates an agency relationship
owner (principal) & manager (agent)
Empowers manager/agent to serve as owner’s fiduciary in matters related to mgmt. of property
words & actions of manager are binding on owner
Agent has a legal obligation to exercise care in managing both money & property for owner
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17. Property Management Fees
Typical property management fee?
3-8% of gross rental income
What about incentive compatibility?
Does manager have an incentive to control/minimize operating expenses?
What about basing management fee on net rental income instead of gross?
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18. Who Hires Property Managers?
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19. Professional Associations & Designations
Many professional & trade organizations exist
Institute of Real Estate Management (IREM)
Building Owners & Managers Association International (BOMA)
National Association of Residential Property Managers
International Facilities Management Association
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20. Professional Associations & Designations
Provide professional education & work to enhance status of professional property managers by
promoting conduct & performance standards
offering professional designations
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21. Professional Associations & Designations
IREM
Certified property manager (CPM)
Accredited resident manager (ARM)—for those specializing in apartment buildings
Accredited management organization (AMO)—awarded to management companies
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22. Professional Associations & Designations
BOMA
Programs aimed primarily at owners & managers of office buildings
Real property administrator (RPA)
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23. Property Management: Just One Aspect of Asset Management
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24. Asset Management Functions
After property is acquired, asset manager must:
Monitor & control operating performance
Site visits, CAPX budgets, property tax assessments
Report value-enhancing opportunities for rehabilitation, historic preservation, modernization, & conversion
Suggest strategies for lowering owner’s cost of capital
Be aware of opportunities to restructure equity ownership
Continually reassess buy vs. hold decision for owner
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25. Performance Evaluation and Compensation
During 1970s & 1980s, investment/asset managers’ compensation typically based on % of assets under management (AUM)
0.50 to 1.50%
This produces clear agency problem
Managers have incentive to acquire & hold assets for principal as sales reduce fee
But investors’ returns may not be maximized by continuing to hold
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26. Recent Trends in Compensation?
Industry is moving to including performance-based compensation for asset managers
Fee tied directly to portfolio performance
Owner & manager must agree on the performance benchmark
actual performance of agent typically evaluated over period of management contract (typically 3-5 years)
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27. Managing Corporate RE Assets
Non real estate corporations own trillions of dollars of RE
Storage facilities, retail outlets, warehouses, office buildings, etc.
These assets often account for 25-40% of total assets of large industrial firms.
Historically, little effort has been expended to manage these assets
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28. Managing Corporate RE Assets
Corporations beginning to pay more attention
In-house real estate management personal
Asset management consultants
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29. Managing Corporate RE Assets
Issues/required work:
Site analysis
Buy vs. lease decisions
Acquisitions and dispositions
Portfolio refinancing
Facility management
Property tax appeals
Sale and leaseback arrangements
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30. End of Chapter 21
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