Property Manangement Agreement & Risk management Flashcards
Now that you have a basic understanding of the general responsibilities of a property manager, can we manage to agree to talk about the management agreement? And as Beyoncé says:
🎶 If you like it, then you shoulda put it in writing…
Every property owner will be different, so when it comes to the nitty-gritty details of managing a specific property with a specific owner, a property manager’s rights and responsibilities should be expressed in detail in writing in something called the management agreement, also called the property management contract.
The management agreement is a written contract between a property owner and a property manager to establish all duties of the property manager, including operation and leasing activities.
The management agreement should always be signed (or autographed, if you’re feeling like Beyoncé 💅🏽).
Put It in Writing
The same concepts about agency that you learned a few levels ago apply to property owners and their managers. Management agreements establish agency, meaning they give the property manager the legal ability to act on behalf of the property owner.
Property managers and property owners are in a principal-agent relationship, the principal being the owner and the agent being the property manager. Property manager-agents can further be broken down into general agents and special agents.
General Agents
In the world of property management, a general agent is an agent who is authorized to manage all of a principal’s affairs within certain specified areas; they enjoy broader authority than that of a special agent but less than that of a universal agent.
General agents have a wide array of duties they perform for the owner; they do everything from signing leases and answering tenant questions to putting out fresh milk for the apartment’s resident stray cat.
Special Agents
Special agents are more limited, and only have duties in one specific area.
A real estate salesperson is an example of a special agent, as they can only do some things on behalf of the property owner. A property manager with the power to collect rent, but nothing else, is also a special agent.
Universal Agents
Universal agents are all-powerful. They can do everything their principal can do. Universal agents are usually appointed by a power of attorney.
It’s important to know the rights and powers of each of these types of agents, but as a property manager, you will most likely act as a general agent.
But never fear! No matter the type of agent, ALL of a manager’s powers and responsibilities will be outlined in the property management agreement. We’ll get more into this in a few screens.
Management Agreements Establish Agency
You know what they say: It only takes two to party! (People say that, right?)
The property management agreement should include:
The name of the owner, exactly as it appears on the title or deed to the property (if it is owned by a partnership, each partner’s name should be represented in the contract; if owned by a corporation, the corporate name should appear)
The name of the property manager or management company
Identification of the Parties
I bet if you were a property manager, you’d like to know exactly which date to report for duty, right, Anthony? Of course you would! As such, it’s important that the management agreement specify:
What is the beginning date of the contract?
What is the duration of the agreement?
Are there any provisions for early termination of the contract?
As with any other contract, it’s best to be precise when including contract period terms in the management agreement to avoid any sort of liability in the future.
Termination
There should also be language within the agreement outlining under what circumstances the agreement may be terminated. It should identify how much notice is required — 30 days, 60 days, 90 days, etc.
The agreement should also describe the penalties (fees) to be incurred if the owner wishes to terminate the agreement early and, if applicable, what circumstances are acceptable for early termination of the agreement by either party.
Contract Period
Both the property manager and the owner have responsibilities in a property management relationship.
Manager’s Responsibilities
What does the owner expect the manager to do?
The manager’s duties should be detailed in the written agreement. For example, the management agreement will stipulate what periodic reports the manager is expected to make and how often they should make them, how a manager is to disburse funds to keep the property running, and what the expectations are for budgeting, etc.
Owner’s Responsibilities
Management agreements don’t just outline the manager’s responsibilities, but the owners’ as well! For example, who is supposed to maintain property insurance for the property — the manager or the owner?
The contract should also address the owner’s responsibility for miscellaneous management expenses (such as management fees and insurance) the manager is NOT expected to pay.
Division of Responsibilities
You probably want to get paid for all of this stellar managing you’re doing, right?
Luckily, you will get paid in the form of management fees. (Yay! Dinner on you, Anthony!) The management fee is the price an owner pays the manager (or management company) for their services. Simple enough, right? It should go without saying that the management fees must be clearly expressed in the management agreement. But I’m gonna say it anyway!
The management fees must be clearly expressed in the management agreement.
Percentage Fee vs. Flat Fee
Generally speaking, the management fee can come in two forms:
Percentage Fee: A fee paid to the manager based on the effective gross income (EGI) of the building. This includes income from rent plus additional revenue streams.
Flat Fee: Also known as a base fee, this is a fixed fee paid per unit, not based on a percentage of the income.
Oftentimes, management fees are made up of both a flat fee and a percentage fee. There are also variables that can affect the fee amount, like the location of the property being managed, the type of property, or the number of units within the building.
Fee structures are determined by the owner and their goals for the property. A percentage fee (typically 4-10% for smaller properties and 3-5% for larger properties) provides incentive for the manager to increase the building’s income. A manager being compensated by a percentage fee will work hard to maximize the revenue coming in.
Flat fees are pretty rare, but may be more desirable when managing buildings where the owners are more interested in controlling expenses rather than increasing them.
Bonuses and Commissions
In addition to the management fees, the contract should also specify which bonuses or commissions the owner will pay the manager, if any.
For example, the owner might offer a lump-sum bonus if the manager is able to lease the building to capacity (meaning there are no vacancies). Any of these fees should, as always, be indicated in writing in the contract.
Management Fees
Risk management is the act of identifying and minimizing potential risks that could affect a property. Property managers will often need to assess risks so they can purchase the best insurance plan for their company at the best rate.
A few risk factors to consider are damages from fire, floods, workers’ compensation claims and liability, loss of income and occupancy, equipment and machinery hazards, and any cars owned and used by the property.
Risk Management
Much like any Hollywood actor – such as Nicolas Cage – this ACTOR is kind of a big deal. At least concerning risk management.
A
You can avoid a risk altogether simply by removing the source of risk.
Look, Ma! No risk! Avoidance could also look like restricting access to a dangerous area of a building.
C
You can work to control the risk or reduce it.
Controlling a risk could also look like installing a sprinkler system for a fire or setting up a security alarm system.
T
You could transfer the risk, meaning you could take out an insurance policy to cover the event. This would shift (or transfer) liability to another party, sharing financial and damage responsibility.
O
This just stands for the word “or.” Pretty simple, but I think you can handle it. 😉
R
You can retain the risk. This often happens with events that are just plain unlikely to happen. With retention, a property manager simply accepts the small amount of risk involved. This is also called self-insurance.
This might look like a property manager in a landlocked state refraining from purchasing hurricane insurance. They would be retaining the risk of hurricane-induced damages (because, as you know, hurricanes are sort of restricted to oceans).
A chart describing approaches to risk management using the word ACTOR as a mnemonic device: Avoid, Control, Transfer, Or, Retain.
ACTOR
Owners typically depend on their property managers to work with insurance agencies to handle any claims related to the property that may arise. Here are a few examples of the types of insurance for which a property manager would typically be responsible.
Renter’s Insurance
If a property manager’s tenants are required to get renter’s insurance, any risks that could occur are shared with the renter. Renter’s insurance is also beneficial to a property manager because it may decrease their overall expenses for damages or negligence.
Commercial Insurance
Commercial insurance is a little different in that the leases for these properties usually include indemnification provisions. These require one party to reimburse the other for losses or damages incurred as a result of a claim against that other party.
The more possession and control a landlord holds over a certain property, the more liable for personal injury or property damage they are. However, in places like an individual retail space in a shopping center, the landlord does not have possession or control that would hold them liable.
Let’s say a store customer is injured after tripping over a crack in the concrete floor and decides to sue. The indemnification provision would detail which party (either the landlord or the tenant) is responsible for the lawsuit and paying damages.
It is important to note that having insurance doesn’t mean you and your property owner will get a free replacement for all damaged items in the case of disaster. (Bummer, I know.)
Commercial Insurance: Hazard Insurance
Another type of commercial insurance property managers should be aware of is hazard insurance, or insurance against loss or damage to real property improvements. Hazard insurance is required by most mortgage lenders to protect the collateral.
Contents and Personal Property Insurance
Contents and personal property insurance covers… the contents of your home and your personal property. This insurance comes in handy in the case of something like a break-in or theft. The insurance provider will typically provide funds to replace the item that was stolen.
Breeds of Insurance
Renter’s insurance, commercial insurance, and contents and personal property insurance are all important, but let’s move on to more situation-specific insurance coverage available to both owners and property managers of income property.
We’ll look at the seven most common types. They are:
Fire and extended coverage
Business interruption
Liability
Workers’ compensation
Casualty
Surety bonds
Flood and hurricane
Property owners and managers can have all of these types of insurance, or they can opt for a combination that fits their particular needs.
Snow White and the Seven Types of Insurance
Fire and Extended Coverage
Fire and extended coverage insurance protect against loss or damage to a property if a fire were to happen on the premises.
Extended coverage covers damages from things like wind storms, hurricanes, hail, explosions, riots, civil commotions, smoke, and air and land vehicles. Oh my!
Business Interruption
What happens when someone or something tries to get all up in your business? There’s an insurance for that.
Interruption insurance, also called rent-loss insurance, is there in the case of a loss of income resulting from something happening to or on the property that makes it unable to produce income.
Liability
You know all the things that could happen to a home when new people walk through it? Imagine what a public space ends up looking like!
There’s an insurance for that too, and it’s called public liability insurance. This is for all the risks that have to be taken care of when the public enters the building.
Workers’ Compensation
What if an employee gets hurt on the job? Workers’ compensation, hopefully!
Workers’ compensation insurance provides medical care and some of the lost wages to employees who have suffered from a work-related illness or injury. This kind of insurance is designed to protect employers from lawsuits. Workers’ compensation requirements are regulated by law, so any workers’ compensation plans a property manager has in place must comply with any applicable laws.
Casualty
What if someone breaks into the property? What if they cause great damage? That’s where casualty insurance comes in handy. This type of insurance covers damages caused by theft, burglary, vandalism, or machinery damage. Casualty insurance is typically not all-inclusive but instead is targeted toward specific risks.
Surety Bonds
Surety bonds are there in case an employee makes criminal or negligent decisions concerning the property. This kind of insurance covers a property owner against financial losses that could occur.
Flood and Hurricane
Flood insurance is necessary if a property is located inside of a floodplain area. Floods gonna flood, so it’s best to prepare and be protected.
If a prospective buyer asks about a property’s location in regards to a flood zone, you should direct the buyer to obtain an up-to-date flood map from FEMA.
Situation-Specific Insurance Coverage
Insurance: You Win Some, You Lose Some
A comprehensive insurance policy will protect an owner, a property manager, and a property, but the owner’s policies do NOT cover a tenant’s belongings. Tenants should be advised to get their own insurance.
Remember when we talked about the importance of leases identifying what property belongs to a tenant and what property belongs to the property owner? Well, this is important with insurance, too! Whatever property is owned by a tenant will NOT be covered by the owner’s insurance.
Hello, ACTOR, My Old Friend
A (avoid) and C (control) are important when thinking about the physical security and safety of your tenants, employees, and customers. Their safety is something you may be held responsible for as a property manager, so you’ll have to plan accordingly in order to avoid and control potential risks.
Tenants
Now you know exactly what a property management agreement should include. This will help you crush your role as a property manager – all of your property-related bases will be covered! ⚾️
A thorough property management agreement will also help you protect yourself against any weird and disastrous situations the world of real estate might throw at you. Feels good to be out of harm’s way, doesn’t it, Anthony?
Key Terms
Here are the key terms you learned in this chapter:
management agreement
a written contract between a property owner and a property manager to establish all duties of the property manager, including operation and leasing activities
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter.
Property Management Agreement
The management agreement is a written contract between a property owner and a property manager to establish all duties of the property manager, including operation and leasing activities.
There are some basic elements of property management agreements that are fairly universal and common amongst all uses. These include:
Identification of parties
Property description
Scope of authority
Management Fees
The management fee is the price an owner pays the manager (or management company) for their services. Management fees must be clearly expressed in the management agreement. Management fees can come in two forms:
Percentage Fee: A fee paid to the manager based on the effective gross income (EGI) of the building. This includes income from rent plus additional revenue streams.
Flat Fee: Also known as a base fee, this is a fixed fee paid per unit, not based on a percentage of the income.
Risk Management
The act of identifying and minimizing potential risks that could affect a property is known as risk management. Property managers will often need to assess risks so they can purchase the best insurance plan for their company at the best rate.
You can remember the approaches to risk management by thinking of the acronym ACTOR: avoid, control, transfer, or retain.
A chart describing approaches to risk management using the word ACTOR as a mnemonic device: Avoid, Control, Transfer, Or, Retain.
Image description
Insurance
Here are a few examples of the types of insurance for which a property manager would typically be responsible.
Renter’s Insurance: If a property manager’s tenants are required to get renter’s insurance, any risks that could occur are shared with the renter.
Commercial insurance: The leases for commercial properties usually include indemnification provisions. These require one party to reimburse the other for losses or damages incurred as a result of a claim against that other party.
Hazard insurance: This is a type of commercial insurance against loss or damage to real property improvements. Hazard insurance is required by most mortgage lenders to protect the collateral.
Contents and Personal Property Insurance: This covers the contents of your home and your personal property. This insurance comes in handy in the case of something like a break-in or theft. The insurance provider will typically provide funds to replace the item that was stolen.
Chapter Summary
