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Five Things that Should be in Your Property Management Agreement

Most commercial real estate owners hire professional property management.  Selecting property manager is important because a good manager can help an owner maximize the return on its investment.  But it's important that owners include key provisions in the property management agreement.

1. Manager Compensation

Commercial property managers usually charge the owner a fee based upon a percentage of the gross revenues. The percentage will vary depending upon the property type and location.

It's important that owners pay attention to how the “gross revenues” is defined in the agreement. For instance, gross revenues should include rent, forfeited security deposits covering unpaid rent, and business interruption insurance proceeds. But, cash received from a mortgage refinance, tax refunds, security deposits forfeited due to property damage, and property insurance proceeds shouldn't be included in gross revenues.

2. Manager Duties

The manager and owner also should agree on what services the manager will provide. Most managers perform property maintenance, collect rent, and track the property finances.

For multifamily properties, the manager usually handles the marketing and leasing of apartments. The manager may or may not be responsible for leasing office or warehouse properties. In states that require a real estate license to lease property, the property manager must be licensed.

If the manager performs duties outside of the manager’s regular duties, there will be an additional fee. Additional services might include a start-up fee or a transition fee for helping with a property disposition. Frequently, there is a construction management fee for coordinating major capital projects. If so, the property management agreement should describe the types and amounts of those extra fees.

3. Expense Payment and Control

Expense control is critical to a successful real estate investment. The property management agreement should limit when the manager may incur unbudgeted expenses without the owner’s consent. Emergency repairs should be an exception.

Often, the manager may  deviate from the budget by a small percentage. Sometimes, the manager may be able to reallocate expenses from one budget item to another. However, expense overruns that could significantly impact on the property’s finances should require owner consent.

In addition, the property management agreement should describe when the owner must reimburse the manager for its operational expenses. The owner should reimburse the manager for payroll and other expenses relating to employees who work solely at the property. The owner also should reimburse the manager if it advances funds for budgeted expenses. And the manager should be reimbursed for payments required by the mortgage lender requirements.

4. Insurance

The property management agreement should say who will arrange for insurance. Often, the owner will obtain its own property, casualty, and general liability insurance, and any umbrella coverage. If the property owner owns a vehicle, then the owner will need automobile insurance.

The manager must buy insurance relating to its own employees. This includes workers’ compensation, employer liability, employment practices liability, and crime insurance. In addition, the manager also should have  general liability, errors and omissions, and non-owned automobile insurance.

The property management agreement should state the required coverage amounts. Also, the owner may want to include a maximum deductible amount.  

The owner should be a certificate holder on all policies.  And the owner should be an additional insured on the manager’s general liability policies. Where available, the insurance company should waive subrogation.

5. Ending the Relationship

The property management agreement also should describe how it can end. And it should describe each party’s obligations after a termination.

Most property management agreements are for a term of anywhere from one to five years. Sometimes, the parties may agree upon automatic renewal. If so, there should be a procedure if one party doesn't want to renew the agreement.

Either party should be able to terminate the agreement if the other party breaches it. Immediate termination makes sense for serious manager misconduct, such as theft or fraud. Also, the agreement should immediate terminate if the manager loses a required license. Sometimes, parties may notice of a breach and to give the breaching party a chance to “cure” the breach before the ending the relationship.

Property management agreements usually can be terminated if either party files for bankruptcy or is placed under receivership. Finally, every property management agreement should be terminable if the owner transfers the property to a new owner.

Elizabeth Whitman

Elizabeth Whitman is an attorney and broker who has represented clients in more than $1.3 billion in real estate transactions. Elizabeth's law firm, Whitman Legal Solutions, LLC, is located in suburban Washington, DC and represents real estate owners and securities sponsors throughout the nation.

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