Chapter 24 - Property Management

Question 1

Financial Reporting:

Answer 1

A fundamental responsibility of the property manager to the principal. Reports may be required monthly, quarterly, and annually. Required reports typically include an annual operating budget, monthly cash flow reports indicating income, expenses, net operating income, and net cash flow; profit and loss statements based on the cash flow reports and showing net profit; and budget comparison statement showing how actual results match the original budget.

Question 2

Budgeting:

Answer 2

An operating budget based on expected expenses and revenues is a necessity for management. The budget will determine rental rates, amounts available for capital expenditures, required reserve funds, salaries and wages of employees, amounts to be paid for property taxes and insurance premiums and mortgage or debt service. It will indicate the expected return, based on the previous year’s performance.

Question 3

Potential Gross Income:

Answer 3

The maximum amount of revenue a property could generate before accounting for vacancy, collection loss, and expenses. Consists of total rent with full occupancy at established rent rates, plus other income from any source.

Question 4

Effective Gross Income:

Answer 4

The actual income of an investment property before expenses, expressed as total potential income minus vacancy and collection losses.

Question 5

Net Operating Income:

Answer 5

The amount of pre-tax revenue generated from an income property after accounting for operating expenses and before accounting for any debt service.

Question 6

Cash Flow:

Answer 6

The remaining positive or negative amount of income an investment produces after subtracting all operating expenses and debt service from gross income.

Question 7

Capital Expenditures:

Answer 7

Expected expenditures for major items such as renovation or expansion should be included as a budgeting item. Large-scale projects are typically budgeted over a period of years.

Question 8

Cash Reserve:

Answer 8

A cash reserve is a fund set aside from operating revenues for variable expenses, such as supplies, redecorating, and repairs. The amount of the reserve is based on experience with variable expenses in previous years.

Question 9

Americans with Disabilitites Act:

Answer 9

The Americans with Disabilities Act similarly requires landlords in certain circumstances to make housing and facilities available to disabled persons without hindrance.

Question 10

Risk Management:

Answer 10

Depending on the nature of the risk, the size of the potential losses, the likelihood of its happening, and the costs of doing something about it, a manager and owner will generally choose one or more of the following risk management strategies:

avoidance
reduction
transference
retention

Question 11

Gross Lease:

Answer 11

A lease requiring the landlord to pay all of a property’s operating expenses, including those that pertain to an individual tenant.

Question 12

Net Lease:

Answer 12

A lease which requires a tenant to pay rent as well as a share of the property’s operating expenses to the extent provided for in the lease contract.

Question 13

Percentage Lease:

Answer 13

A percentage lease may be gross or net, but the rent is not fixed, but depends on the income generated by the tenant in the leased property. A common
arrangement is to set a fixed base rent plus a percentage of the tenant’s gross income or sales at the site. The percentage calculation may take effect only when the income reaches a certain level. This arrangement is commonly used in retail leases.

Question 14

Inclusions:

Answer 14

Leases should set forth items that excluded or included in the leased property. For instance, a residential lease may include built-in applicances such as dishwashers but exclude freestanding ones, such as refrigerators.

Question 15

Reversionary Rights:

Answer 15

Like the grantor of a life estate, the grantor of a leasehold estate retains a future interest in the estate. The lease grants a number of rights to the property, including, primarily, the rights to enter, possess, and use the property for the term of the lease. The lessee does not enjoy the full bundle of rights to the property.

Question 16

Actual Eviction:

Answer 16

An actual eviction follows a procedure prescribed in state law and stated in the lease contract. The landlord must serve notice on the tenant a specified number of days before beginning the eviction suit. A court issues a judgment for possession, which requires the tenant to vacate. A court officer, such as a sheriff, may forcibly remove the tenant and possessions if the tenant refuses to vacate. The landlord can then enter and take possession.

Question 17

Construction Eviction:

Answer 17

A constructive eviction occurs when a tenant vacates the leased premises and declares the lease void, claiming that the landlord’s actions have made the premises unfit for the purpose described in the lease. The tenant must prove that it was the landlord’s actions that were responsible and may be able to recover damages.

Question 18

Uniform Residential Landlord-Tenant Act:

Answer 18

The Uniform Residential Landlord-Tenant Act is model legislation that has been adopted to a greater or lessor extent in many states. In addition to addressing fair and equitable remedies for breaches by both landlord and tenant, the act aims to clarify imprecise language in residential leases that can lead to confusion or exploitation in such areas as:

lease term
rental amount
security deposit
landlord access
procedures for default and eviction
general obligations of landlord and tenant.

Question 19

Management Plan:

Answer 19

Developing a management plan is a necessary step in beginning a management project, and it may also be part of obtaining a management contract. The manager must consider the owner’s objectives, including financial goals; the competitive market for the property, both local and regional, depending on the property type; and the features of the particular property. The plan will take into account market indicators such as vacancy rates, occupancy rates, absorption rates, and new supply coming onto the market. It will also include a budgetary component that considers sources of revenue and anticipated expenses. Finally, the plan will indicate what the manager intends to do with the property, given these considerations, to manage the property in a way that will meet the owner’s objectives.