LEARNING OBJECTIVES
When you've finished reading this Chapter, you should be able to:
     ► identify the basic elements of a management agreement.
     ► describe a property manager's functions.
     ► explain the role of environmental regulations and the Americans with Disabilities Act in the property manager's job.
     ► distinguish the various types of insurance alternatives.
     ►define the following terms: budget comparison statement; cash flow report; corrective maintenance; management agreement; management plan; multiperil policies; operating budget; preventive maintenance; profit and loss statement; property manager risk; management routine maintenance; surety bonds; tenant improvements; and workers' compensation acts.

REAL ESTATE PRACTICE & PRINCIPLES KEY WORD MATCH QUIZ --- CLICK HERE ---
I would encourage you to take this “Match quiz” now as a pre-chapter challenge to see how many of these key words or phrases you are familiar with. At the end of each chapter I recommend that you take the quiz again to reinforce these important keywords. Each page contains four words or phrases and you need to drag and drop the correct definition into the puzzle key. Each page is considered as a question, but there is no scoring and you can return to each chapter quiz as many times as needed to reinforce your memory. 

 WHY LEARN ABOUT... PROPERTY MANAGEMENT?
There are more than 6 billion square feet of commercial real estate in the United States. And each and every one of those square feet is managed by a property manager or by a property management company. That's a lot of responsibility. If you plan a career in property management, then the reason why you need to know the information in this Chapter is obvious: It's your job description. But even if you don't plan to become a property manager, you may find yourself managing properties on a temporary basis anyway. And even if you never manage a property, you may well have an office in a building that is managed by a property manager. Knowing what he or she is responsible for will help you protect your business interests.

 THE PROPERTY MANAGER
Property management is a real estate specialization. It involves the leasing, managing, marketing, and overall maintenance of real estate owned by others, usually rental property. The property manager has three principal responsibilities:
     1) Financial management
     2) Physical management (structure and grounds)
     3) Administrative management (files and records)

The property manager is responsible for maintaining the owner's investment and making sure the property earns income. This can be done in several ways. The physical property must be maintained in good condition. Suitable tenants must be found, rent must be collected, and employees must be hired and supervised. The property manager is responsible for budgeting and controlling expenses, keeping proper accounts, and making periodic reports to the owner. In all of these activities, the manager's primary goal is to operate and maintain the physical property in such a way as to preserve and enhance the owner's capital investment.

Some property managers work for property management companies. These firms manage properties for a number of owners under management agreements (discussed later in this Chapter). Other property managers are independent. The property manager has an agency relationship with the owner, which involves greater authority and discretion over management decisions than an employee would have. A property manager or an owner may employ building managers to supervise the daily operations of a building. In some cases, these individuals may be residents of the building.

IN PRACTICE      In most states, property managers who serve the public for a fee must be licensed real estate brokers. In other states, property managers must be licensed specifically as property managers. Key components of property management (leasing, renting and collecting rent) are considered real estate activities under existing Tennessee real estate licensing laws. If a property manager is going to lease or list real estate, or negotiate or attempt to negotiate to perform any of those acts, or collect rent or attempt to collect rent, or if he or she holds herself out as engaging in any of those activities, he or she will need a broker's license. A salesperson working under a broker may engage in such activities.

An exception to the requirement that a Tennessee property manager have a real estate broker's license is that resident managers (for brokers or owners) of apartments, duplexes or residential complexes are exempt if their duties are limited to supervision, exhibition of residential units, leasing or collection of security deposits and rentals from the property. Resident managers cannot negotiate the amounts of security deposits or rentals, nor may they negotiate leases on behalf of the broker.
 
Securing Management Business
Possible sources of property management business include
► community associations,
► corporate owners,
► apartment developers and landlords,
► condominium associations,
► homeowners' associations,
► investment syndicates,
► trusts,
► individual owners who want professional property management, and
► absentee owners.

When a property manager secures business from any of these sources, a good reputation is often the manager's best advertising. A manager who consistently demonstrates the ability to increase property income over previous levels should have little difficulty finding new business.

A growing trend for the management of associations and planned unit developments is for a community association management to provide a team of property managers, accounting staff, office staff, and property consultants for property management. The prevalence of homeowner and condominium associations combined with complex planning and development codes have placed new demands on property managers. Working as part of a team, property managers assist in providing a comprehensive array of services.

Before contracting to manage any property, however, the professional property manager should be certain that the building owner has realistic income expectations. Necessary maintenance, unexpected repairs, and effective marketing all take time and money. In addition, most states have landlord-tenant laws that require the landlord (owner) to keep the property repaired and make sure it complies with building codes. Through the agency relationship with the owner, the property manager becomes responsible for repairs and the building's condition.

The Management Agreement
The first step in taking over the management of any property is to enter into a management agreement with the owner. This management agreement creates an agency relationship between the owner and the property manager. The property manager usually is considered to be a general agent. As an agent, the property manager is charged with the fiduciary responsibilities of care, obedience, accounting, loyalty, and disclosure. After entering into an agreement with a property owner, a manager handles the property the same way the owner would. In all activities, the manager's first responsibility is to realize the highest return on the property in a manner consistent with the owner's instructions.

Like any other contract involving real estate, the management agreement should be in writing. It should include the following points:
► Description of the property.
► Time period the agreement covers and specific provisions for termination.
► Definition of the management's responsibilities. All the manager's duties should be specifically stated in the contract. Any limitations or restrictions on what the manager may do should be included.
► Statement of the owner's purpose. The owner should clearly state what he or she wants the manager to accomplish. One owner may want to maximize net income, while another will want to increase the capital value of the investment. What the manager does depends on the owner's long-term goals for the property.
► Extent of the manager's authority. This provision should state what authority the manager is to have in matters such as hiring, firing, and supervising employees; fixing rental rates for space; and making expenditures and authorizing repairs. Repairs that exceed a certain expense limit may require the owner's written approval.
► Reporting. The frequency and detail of the manager's periodic reports on operations and financial position should be agreed on. These reports serve as a means for the owner to monitor the manager's work. They also form a basis for both the owner and manager to spot trends that are important in shaping management policy. In general, state Real Estate Commissions have rules concerning reporting which must be followed.
► Compensation. The management fee or other form of compensation may be based on a percentage of gross or net income, a fixed fee, or some combination of these and other factors. The compensation provision of the agreement should state the base fee, as well as any leasing fees, supervision fees, or other commissions or compensations. Management fees are subject to the same antitrust considerations as sales commissions, that is, they cannot be standardized in the marketplace; standardization would be viewed as price-fixing. The fee must be negotiated between the agent and the principal. In addition, the property manager may be entitled to a commission on new rentals and renewed leases. Finally, the agreement should require that the manager be included as an "additional insured" on the property liability policy.
► Allocation of costs. The agreement should state which of the property manager's expenses—such as office rent, office help, telephone, advertising, and association fees—will be paid by the manager. Other costs will be paid by the owner.
► Equal opportunity statement. Residential property management agreements should include a statement that the property will be shown, rented, and otherwise made available to all persons regardless of race, color, religion, sex, handicap, national origin, or family status, and to any class of person protected by state or federal law.

 PROFESSIONAL ASSOCIATIONS
Most metropolitan areas have local associations of building and property owners and managers that are affiliates of regional and national associations. The Institute of Real Estate Management (IREM) is one of the affiliates of the National Association of REALTORS®. It awards the Certified Property Manager (CPM) designation. The Building Owners and Managers Association International (BOMA) is a federation of local associations of building owners and managers. The Building Owners and Managers Institute International (BOMI), an independent institute affiliated with BOMA, offers training courses leading to several designations: Real Property Administrator (RPA), Systems Maintenance Administrator (SMA), and Facilities Management Administrator (FMA). Other associations include the National Apartment Association (NAA) and the National Association of Residential Property Managers (NARPM). In addition, many specialized professional organizations provide information and contacts for condominium association managers, shopping center managers and others.

 MANAGEMENT FUNCTIONS
A property manager's specific responsibilities are determined by the management agreement. Certain duties, however, are found in most agreements. These include budgeting, capital expenditures, setting rental rates, selecting tenants, collecting rent, maintaining the property, and complying with legal requirements.

Budgeting Expenses
Before attempting to rent any property, the property manager should develop an operating budget. The budget should be based on anticipated revenues and expenses. In addition, it must reflect the owner's long-term goals. In preparing a budget, the manager should allocate money for continuous, fixed expenses such as employees' salaries, property taxes, and insurance premiums.

Next, the manager should establish a cash reserve fund for variable expenses such as repairs, decorating, and supplies. The amount allocated for the reserve fund can be computed from the previous yearly costs of the variable expenses.

Capital expenditures.
The owner and the property manager may decide that modernization or renovation of a property will enhance its value. In this case, the manager should budget money to cover the costs of remodeling. The property manager should either be thoroughly familiar with the principle of contribution (discussed in Chapter 18) or seek expert advice when estimating any expected increase in value. In the case of large-scale construction, the expenses charged against the property's income should be spread over several years.
 
The cost of equipment to be installed in a modernization or renovation must be evaluated over its entire useful life. This is called life cycle costing. This term simply means that both the initial and the operating costs of equipment over its expected life must be measured to compare the total cost of one type of equipment with that of another.

Renting the Property
Effective rental of the property is essential. However, the role of the property
manager in managing a property should not be confused with that of a broker who acts as a leasing agent. The manager must be concerned with the long-term financial health of the property; the broker is concerned solely with renting space. The property manager may use the services of a leasing agent, but that agent does not undertake the full responsibility of maintaining and managing the property.

Setting rental rates.
Rental rates are influenced primarily by supply and demand. The property manager should conduct a detailed survey of the competitive space available in the neighborhood, emphasizing similar properties. In establishing rental rates, the property manager has the following four long-term considerations:
     1) The rental income must be sufficient to cover the property's fixed charges and operating expenses.
     2) The rental income must provide a fair return on the owner's investment.
     3) The rental rate should be in line with prevailing rates in comparable buildings; it may be slightly higher or slightly lower, depending on the strength of the property.
     4) The current vacancy rate in the property is a good indicator of how much of a rent increase is advisable. A building with a low vacancy rate (that is, few vacant units) is a better candidate for an increase than one with a high vacancy rate.

A rental rate for residential space is usually stated as the monthly rate per unit. Commercial leases—including office, retail and industrial space rentals—are usually stated according to either annual or monthly rates per square foot.

If the vacancy level is high, the manager should attempt to determine why. An elevated level of vacancy does not necessarily indicate that rents are too high. Instead, the problem may be poor management or a defective or an undesirable property. The manager should attempt to identify and correct the problems first rather than immediately lower rents. On the other hand, a high occupancy rate may mean that rental rates are too low. Whenever the occupancy level of an apartment house or office building exceeds 95 percent, serious consideration should be given to raising rents. First, however, the manager should investigate the rental market to determine whether a rent increase is warranted.

Selecting Tenants
A building manager's success depends on establishing and maintaining sound, long-term relationships with his or her tenants. The first and most important step is selection. The manager should be sure that the premises are suitable for a tenant in size, location, and amenities. Most important, the manager should be sure that the tenant is able to pay for the space.
 
A commercial tenant's business should be compatible with the building and the other tenants. The manager must consider the business interests of his or her current tenants as well as the interests of the potential tenant. The types of businesses or services should be complementary, and the introduction of competitors into the same property should be undertaken with care. This not only pleases existing tenants but helps diversify the owner's investment and makes profitability more likely. Some commercial leases bar the introduction of similar businesses.

If a commercial tenant is likely to expand in the future, the manager should consider the property's potential for expansion.

The residential property manager must be sure to comply with all federal, state and local fair housing laws in selecting tenants (see Chapter 16 and Chapter 20). Although fair housing laws do not apply to commercial properties, commercial property managers need to be aware of federal, state, and local antidiscrimination and equal opportunity laws that may govern industrial or retail properties.


Collecting rents.
A property manager should accept only those tenants who can be expected to meet their financial obligations. The manager should investigate financial references, check with local credit bureaus, and, when possible, interview a prospective tenant's former landlord.

The terms of rental payment should be spelled out in the lease agreement, including
 ► time and place of payment,
► provisions and penalties for late payment and bounced checks, and
► provisions for cancellation and damages in case of nonpayment.

The property manager should establish a firm and consistent collection plan. The plan should include a system of notices and records that complies with state and local law.

Every attempt must be made to collect rent without resorting to legal action. Legal action is costly and time-consuming and does not contribute to good tenant relations. In some cases, however, legal action is unavoidable. In these instances, a property manager must be prepared to initiate and follow through with the necessary legal steps. Obviously, legal action must be taken in cooperation with the property owner's or management firm's legal counsel.

Maintaining Good Relations with Tenants
The ultimate success of a property manager depends on the ability to maintain good relations with tenants. Dissatisfied tenants eventually vacate the property. A high tenant turnover rate results in greater expenses for advertising and redecorating. It also means less profit for the owner due to uncollected rents.

An effective property manager establishes a good communication system with tenants. Regular newsletters or posted memoranda help keep tenants informed and involved. Maintenance and service requests must be attended to promptly, and all lease terms and building rules must be enforced consistently and fairly. If a manager fails to treat all tenants the same in terms of rent collection and enforcement of lease terms or rule and regulations, the manager could be violating fair housing laws. A good manager is tactful and decisive and acts to the benefit of both owner and occupants.

The property manager must be able to handle residents who do not pay their rents on time or who break building regulations. When one tenant fails to follow the rules, the other tenants often become frustrated and dissatisfied. Careful record keeping shows whether rent is remitted promptly and in the proper amount. Records of all lease renewal dates should be kept so that the manager can anticipate expiration and retain good tenants who might otherwise move when their leases end.

Maintaining the Property
One of the most important functions of a property manager is the supervision of property maintenance. A manager must learn to balance the services provided with their costs, that is, to satisfy tenants' needs while minimizing operating expenses.

To maintain the property efficiently, the manager must be able to assess the building's needs and how best to meet them. Staffing and scheduling requirements vary with the type, size, and geographic location of the property, so the owner and manager usually agree in advance on maintenance objectives. In some cases, the best plan may be to operate a low-rental property, with minimal expenditures for services and maintenance. Another property may be more lucrative if kept in top condition and operated with all possible tenant services. A well-maintained, high-service property can command premium rental rates.
 
A primary maintenance objective is to protect the physical integrity of the property over the long term. For example, preserving the property by repainting the exterior or replacing the heating system helps decrease long-term maintenance costs. Keeping the property in good condition involves the following four types of maintenance:
     1) Preventive
     2) Repair or corrective
     3) Routine
     4) Construction

Preventive maintenance includes regularly scheduled activities such as painting and seasonal servicing of appliances and systems. Preventive maintenance preserves the long-range value and physical integrity of the building. This is both the most critical and the most neglected maintenance responsibility. Failure to perform preventive maintenance invariably leads to greater expense in other areas of maintenance.

Repair or corrective maintenance involves the actual repairs that keep the building's equipment, utilities, and amenities functioning. Repairing a boiler, fixing a leaky faucet, and mending a broken air-conditioning unit are acts of corrective maintenance.

A property manager also must supervise the routine maintenance of the building. Routine maintenance includes such day-to-day duties as cleaning common areas, performing minor carpentry and plumbing adjustments, and providing regularly scheduled upkeep of heating, air-conditioning, and landscaping. Good routine maintenance is similar to good preventive maintenance. Both head off problems before they become expensive.

IN PRACTICE One of the major decisions a property manager faces is whether to contract for maintenance services from an outside firm or hire on-site employees to perform such tasks. This decision should be based on a number of factors, including the
► size of the building,
► complexity of the tenants' requirements, and
► availability of suitable labor.

A commercial or an industrial property manager often is called on to make tenant improvements. These are alterations to the interior of the building to meet a tenant's particular space needs. Such construction alterations range from simply repainting or recarpeting to completely gutting the interior and redesigning the space by erecting new walls, partitions, and electrical systems. Tenant improvements are especially important when renting new buildings. In new construction, the interiors are usually left incomplete so that they can be adapted to the needs of individual tenants. One matter that must be clarified is which improvements will be considered trade fixtures (personal property belonging to the tenant) and which will belong to the owner of the real estate. Trade fixtures are discussed in Chapter 2.

Modernization or renovation of buildings that have become functionally obsolete and thus unsuited to today's building needs is also important. (See Chapter 18 for a definition of functional obsolescence.) The renovation of a building often enhances the building's marketability and increases its potential income.

Handling Environmental Concerns
The environment is an increasingly important property management issue. A variety of environmental issues, from waste disposal to air quality, must be addressed by the property manager. Tenant concerns, as well as federal, state, and local regulations, determine the extent of the manager's environmental responsibilities. While property managers are not expected to be experts in all of the disciplines necessary to operate a modern building, they are expected to be knowledgeable in many diverse subjects, most of which are technical in nature. Environmental concerns are one such subject.

The property manager must be able to respond to a variety of environmental problems. He or she may manage structures containing asbestos or radon or be called on to arrange an environmental audit of a property. Managers must see that any hazardous wastes produced by their employers or tenants are properly disposed of. Even the normally nonhazardous waste of an office building must be controlled to avoid violation of laws requiring segregation and recycling of types of wastes. Of course, a property manager may want to provide recycling facilities for tenants even if he or she is not required by law to do so. On-site recycling creates an image of good citizenship that enhances the reputation (and value) of a commercial or residential property. Environmental issues, including lead-based paint abatement issues, are discussed in detail in Chapter 21.

The Americans with Disabilities Act
The Americans with Disabilities Act (ADA) has had a significant impact on the responsibilities of the property manager, both in building amenities and in employment issues.

Title I of the ADA provides for the employment of qualified job applicants regardless of their disability. Any employer with 15 or more employees must adopt nondiscriminatory employment procedures. In addition, employers must make reasonable accommodations to enable individuals with disabilities to perform essential job functions.

Property managers also must be familiar with Title III of the ADA, which prohibits discrimination in commercial properties and public accommodations. The ADA requires that managers ensure that people with disabilities have full and equal access to facilities and services.

FOR EXAMPLE      A prospective tenant is visually impaired. The property manager should be prepared to provide a lease agreement that is enlarged or printed in Braille.

The property manager typically is responsible for determining whether a building meets the ADA's accessibility requirements. The property manager also must prepare a plan for retrofitting a building that is not in compliance when removal of existing barriers is "readily achievable"—that is, can be performed without much difficulty or expense. There are some tax advantages available to help off-set the expense of complying with ADA. ADA experts may be consulted, as may architectural designers who specialize in accessibility issues.
 
To protect owners of existing structures from the massive expense of extensively remodeling, the ADA recommends reasonably achievable accommodations to provide access to the facilities and services. New construction and remodeling, however, must meet higher standards of accessibility and usability because it costs less to incorporate accessible features in the design than to retrofit. Though the law intends to provide for people with disabilities, many of the accessible design features and accommodations benefit everyone.

Existing barriers must be removed when this can be accomplished in a readily achievable manner—that is, with little difficulty and at low cost. The following are typical examples of readily achievable modifications:
► Ramping or removing an obstacle from an otherwise accessible entrance
► Lowering wall-mounted public telephones
► Adding raised letters and braille markings on elevator buttons
► Installing auditory signals in elevators
► Reversing the direction in which doors open

Alternative methods can be used to provide reasonable accommodations if extensive restructuring is impractical or if retrofitting is unduly expensive. For instance, installing a cup dispenser at a water fountain that is too high for an individual in a wheelchair may be more practical than installing a lower unit.

IN PRACTICE      Federal, state, and local laws may provide additional requirements for accommodating people with disabilities. Licensees should be aware of the full range of laws to ensure that their practices are in compliance.

 RISK MANAGEMENT
Enormous monetary losses can result from certain unexpected or catastrophic events. As a result, one of the most critical areas of responsibility for a property manager is risk management. Risk management involves answering the question, "What happens if something goes wrong?" The perils of any risk must be evaluated in terms of options. In considering the possibility of a loss, the property manager must decide whether it is better to
► avoid it, by removing the source of risk (for instance, a swimming pool may
pose an unacceptable risk if a day-care center is located in the building);
► control it, by preparing for an emergency before it happens (by installing
sprinklers, fire doors, and security systems, for example);
► transfer it, by shifting the risk onto another party (that is, by taking out an insurance policy); or
► retain it, by deciding that the chances of the event occurring are too small to justify the expense of any other response (an alternative might be to take out an insurance policy with a large deductible, which usually is considerably less expensive).
  
Security of Tenants
The physical safety of tenants of the leased premises is an important issue for property managers and owners. Recent court decisions in several parts of the country have held owners and their agents responsible for physical harm that was inflicted on tenants by intruders. These decisions have prompted property managers and owners to think about how to protect tenants and secure apartments from intruders. There is also the concern of wrongdoing or criminal behavior inflicted by tenants on other tenants in the building. Many leases now have a crime-free provision that makes criminal activity, such as drug use or assault, a ground for eviction.

Types of Insurance
Insurance is one way to protect against losses. Many types of insurance are avail able. An insurance audit should be performed by a competent, reliable insurance agent who is familiar with insurance issues for the type of property involved. The audit will indicate areas in which greater or lesser coverage is recommended and will highlight particular risks. The final decision, however, must be made by the property owner.

Some common types of coverage available to income property owners and managers follow:
 ► Fire and hazard. Fire insurance policies provide coverage against direct loss or damage to property from a fire on the premises. Standard fire coverage can be extended to include other hazards such as windstorm, hail, smoke damage, or civil insurrection.
► Consequential loss, use, and occupancy. Also known as loss of rent or business interruption insurance, consequential loss insurance covers the results, or consequences, of a disaster. Consequential loss can include the loss of rent or revenue to a business that occurs if the business's property cannot be used.
► Contents and personal property. This type of insurance covers building contents and personal property during periods when they are not actually located on the business premises.
► Liability. Public liability insurance covers the risks an owner assumes whenever the public enters the building. A claim paid under this coverage is used for medical expenses by a person who is injured in the building as a result of the owner's negligence. Claims for medical or hospital payments for injuries sustained by building employees hurt in the course of their employment are covered by state laws known as workers' compensation acts. These laws require that a building owner who is an employer obtain a workers' compensation policy from a private insurance company.
► Casualty. Casualty insurance policies include coverage against theft, burglary, vandalism, and machinery damage as well as health and accident insurance. Casualty policies are usually written on specific risks, such as theft, rather than being all-inclusive.
► Surety bonds. Surety bonds cover an owner against financial losses resulting from an employee's criminal acts or negligence while performing assigned duties.

Many insurance companies offer multiperil policies for apartment and commercial buildings. Such a policy offers the property manager an insurance package that includes standard types of commercial coverage, such as fire, hazard, public liability, and casualty. Special coverage for terrorism, earthquakes and floods is also available.

Claims
Two possible methods can be used to determine the amount of a claim under an insurance policy. One is the depreciated or actual cash value of the damaged property, that is, the property is not insured for what it would cost to replace it, but rather for what it was originally worth, less the depreciation in value that results from use and the passage of time. The other method is current replacement cost. In this sort of policy, the building or property is insured for what it would cost to rebuild or replace it today.

When purchasing insurance, a manager must decide whether a property should be insured at full replacement cost or at a depreciated cost. Full replacement cost coverage is generally more expensive than depreciated cost. As with the home-owner's policies discussed in Chapter 3, commercial policies include coinsurance clauses that require the insured to carry fire coverage, usually in an amount equal to 80 percent of a building's replacement value.

 SUMMARY
Property management is a specialized service provided to owners of income-producing properties. The owner's managerial function may be delegated to an individual or a firm with particular expertise in the field. The manager, as agent of the owner, becomes the administrator of the project and assumes the executive functions required for the care and operation of the property.

A management agreement establishes the agency relationship between owner and manager. It must be prepared carefully to define and authorize the manager's duties and responsibilities.

This growing real estate specialty is supported by many regional and national organizations that help property managers maintain high professional standards.

Projected expenses, the manager's analysis of the building's condition, and local rent patterns form the basis for determining rental rates for the property. Once a rent schedule is established, the property manager is responsible for soliciting tenants whose needs are suited to the available space. The tenants must be financially capable of meeting the proposed rents. The manager collects rents, maintains the building, hires necessary employees, pays taxes for the building, and deals with tenant problems.

Maintenance includes safeguarding the physical integrity of the property and performing routine cleaning and repairs. It also includes making tenant improvements, such as adapting the interior space and overall design of the property to suit tenants' needs.

The manager is expected to secure adequate insurance coverage for the premises. Fire and hazard insurance covers the property and fixtures against catastrophes. Consequential loss, use, and occupancy insurance protects the owner against revenue losses. Casualty insurance provides coverage against losses such as theft, vandalism, and destruction of machinery. The manager should also secure public liability insurance to insure the owner against claims made by people injured on the premises. Workers' compensation policies cover the claims of employees injured on the job.