Week 1 Flashcards
define property Management
“The art of maintaining and improving (where appropriate) a property asset on behalf of another person or entity to optimise its utility, serviceability and functionality for the purposes of maximising efficiency (generally measured in terms of profits and/or yields).”
colliers grad program :)
professional managers work in one of 3 capacities
- As employees of an owner of extensive properties (a portfolio)
- As an independent, third party hired by (several) owners to undertake responsibilities set out in the terms of a management contract
- An employee or contractor working for Real Estate Agencies
In each case a property manager is responsible for the maintenance and daily operations of a physical building or property investment.
functions of a PM
o Achieve objectives of owner o Generate income for owner o Preserve or increase value of investment property o Shortsighted owners?? o Milking the property o Slumlords
what do PM’s do
o Rent (income)
o Tenants (occupants)
o Maintenance & repairs (expenses)
o Knowledge of Landlord-Tenant law (legislation)
o Safety standards (risk & compliance)
o Financial records (managing a budget, maintaining records &
what makes up a magement plan
see image in notes :)
regional market analysis may include
o Population statistics and trends o Major employers in the area o Average incomes and employment data o Description of transportation facilities o Supply and demand trends o Economic base of the city o Future economic prospects
neighbourhood market analysis may include
o Boundaries and land usage o Local building codes and regulations o Transportation and utilities o Economy o Supply and demand o Neighborhood amenities and facilities
Information required to formulate operating budget
o Optimum rents o Gross rental income o Total anticipated revenue o Operating costs o Reserve funds o Cash
define operating budget
one year projected operating budget
define 5 year forceast
difficult to project realistically due to changes in economic activity
define comparative income and expense analysis
cost V recouping of costs for owners; need to update to keep property competitive.
Presenting the plan!! How well will it be received by owners?
explain the golden rule in relation to ethics
see slides
explain fiduciary duties (trusts)
o Duty of Loyalty – must always put owner’s interests first! (not in PM’s self-interest eg. Fee for leasing – but should not accept any tenant without adequate screening), information must remain confidential
o Duty of Care – reasonable skill and care in managing property
o Duty of Obedience – PM must carry out owner’s instructions (but not illegal requests!)
o Duty of Accounting – accurately report on funds, income/expenses
o Duty of Disclosure – PM keep owner fully informed
explain principle and agent
Who are the Principal and Agent? o Principals (Shareholders/Owners) own most of the firm’s equity
o Managers (Agents) manage the firm on behalf of absentee owners
o Owners & managers are separate, this separation of ownership and control allows “moral hazard” to occur
o Two parties agent and owners. Property manager acts in a way that is not is in the best interest of the owners, rather acting in their self-interest. Principle (owner) cannot observe these actions
what is moral hazard?
is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.
Eg. Bank deposit insurance (i.e. GFC)
the ignorant party lacks information about performance of the agreed upon transaction or lacks the ability to retaliate for a breach of the agreement
an example of moral hazard is when people are more likely to behave recklessly after becoming insured, either because the insurer cannot observe this behaviour or cannot effectively retaliate against it
result of moral hazard
Result –
Agency costs : ↓ in benefits or ↑ agency costs due to owners requiring monitoring of managers & contracts to control behaviour
moral hazard over management conflict
o Managers have incentive to consume perks as their ownership share declines
o Perks take monetary and non-monetary form
o Perk consumption a problem because owners have a residual claim on firm cash flow
explain moral hazard and managerial expense preference theory
o managers may act in their own interests
o maximise personal power / benefits compared to owners’ interest of maximising profits eg. Penthouse, plush office, artwork etc
explain a management contract
Identification of the parties and the property
o Parties vary – sole, partnership, corporations
o Identifying the property – clear identification
o Exclusions – noted in contract, example multi-use buildings may have residential and commercial activity
Contract period
o Terms vary – long-term contracts are uncommon, provision for cancellation
o Termination – appropriate notice for either party
explain management resposnisbilities
o Monthly reports and disbursements
o Fidelity bonds – insurance protection for theft of money/property (PEXA eg!)
o Handling funds – no co-mingling of funds!
o Authority to rent, operate, and manage properties
o Expenditures – limits agreed that agent can undertake without owner’s permission
o Marketing costs
o Agent’s control over personnel – authority to hire/fire
Owner’s responsibilities – what is designated to owner??
o Payroll – this may be outsourced
o Insurance – owner needs to take responsibility
o Purchasing – owner needs to provide the schedule of payments that must be made (agent can then determine budget)
o Building repairs – owner needs to make repairs and replacements, must adhere to laws (tenancy laws)
o Advertising costs – generally devolved to owners
explain a management fee
o Flat fee or fixed fee (usual per unit) versus percentage fee (incentive to increase income of a building)
o Commissions to outside leasing agents – if not sole agent
o Early termination- compensation required
o Antitrust issues (Aust Equivalent – Australian Competition and Consumers Commission (ACCC)
Monthly reports o Personal contact – mutually satisfactory relationship – see week 1 article ( 5 types of landlords businesses will encounter!) o Mums and dads, families, management companies, real-estate developers, REIT’s o Monthly earnings report – means of communication b/w agent and owner o Delinquent accounts – keep to a minimum o Continued personal interest o Ongoing contact – relates to building a lasting relationship…goodwill, trust etc o Manage human relations
a property manager needs not to be concerned with owners long term goals
false
high tech companies often locate near university in incubator spaces
true
property managers do not need to be involves in community activites
False
slumlords are owners who pour money back into older properties
False
ethical behaviour is often considered the equivalent of fairness and putting the client’s interest ahead of the managers’
true
the primary function of a property manager is to extract as much money as possible from the managed property
false
What is the role of the PM and how does it change across the various categories of properties?
Functions and responsibilities:
1. Providing the investor the highest return on their investment with as little risk as possible.
2. Maintain property and its value
3. Ensuring the right tenant! Appropriate use of facilities, no damage to the property.
o The role of a PM has many similarities to a typical Business manager.
o The complexity of a PM role will largely vary depending on the quantity of units being managed or the size or use of the Property itself.
o Typically the larger the scope of work for the PM the more the job will be like managing a business.
Advantages of working as an employee manager compared to a third party manager?
Need to define the two main types of manager roles:
Employee Manager – employee of an owner who has extensive properties. For example, a Real Estate Investment Trust (REITs) such as Westfield properties - a listed company holding numerous properties, Superannuation or pension funds, banks etc who all employ their own PMs to care for retail premises or office buildings
Third-party managers – Independent managers who work for several owners, contract their services to a number of different owned properties
Employee Manager Advantages:
o Gain expertise in one type of property, provide expertise to owners
o Gain expertise in all facets of property management – ie housekeeping, lease preparation, building systems, maintenance, exterior grounds
Third Party Manager Advantages:
o Outsourcing PM to third parties to gain cost economies
o Externally managed properties make it easier, more flexible to move capital between properties and locations.
o May prefer third-party as provides more variety, more autonomy
o Visit “In house management vs. using a third party manager – The business of property management”
Why use a property Manger – benefits to:
What are potential benefits to:
The client/owner/landlord
The client/owner/landlord?
o A PM will stay abreast of the always changing legislative requirements
o PMs will often have good relationships with trades’ people given the volume of work they often give them and therefore work will be cheaper
o PMs better equipped to find the right tenants
o PMs experience in screening leads to better tenants and for longer term tenanats.
o PMs better access to advertising avenues both internally in their company and externally which attracts larger amount of potential tenants.
o PMs instigate formal processes in relation to arrears in rent quicker than an owner-manage
Why use a property Manger – benefits to:
What are potential benefits to: Tennants
Tennant:
o A tenant prefer to liaise with a PM in preference over a client/owner/landlord (privacy etc) may be more attracted to renting a Property with a PM then without.
o Tenants may feel that it is difficult to request improvements, reimbursements etc directly from the owner; they may feel the owner does not want to provide solutions or spend money on repairs etc.
o Rental process streamlined as professional PM is cognisant of legal and other requirements
However, a Property with a PM may command a premium and may have more fixed leases, some residential tenants might look for the other option
hy use a property Manger – benefits to:
What are potential benefits to: the organisation the pm works for
o Revenue determined by the management fees and number of properties managed
o Client base is increased, develop relations with the PM and their firm, more likely to use them to purchase future properties or to sell existing properties (large selling fees may come to the real estate agency)
o Real Estate Institute of Australia (REIA), property self-management is not uncommon. Despite 54.3% of occupied rented properties in Australia being managed by real estate agents, 22.7% are self-managed by landlords
What are the problems that can arise in the principal-agent relationship?
o Principal (the one who hires) o Agent (the one who does the work) o Agency is the term that describes the special relationship between the parties
Agents can stop acting in the best interests of the principal (owner)
o Misappropriates funds,
o Overstates repair costs,
o Employs repair and maintenance (R&M) people who might not be arms-length
o Gets paid a commission for using certain staff
Why should a Property Manager be concerned about ethics?
Discuss Fiduciary Relationship and the duties required by agents
Fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons).
o Typically, a fiduciary prudently takes care of money or other asset for another person. …
o A fiduciary duty, is the highest standard of care at either equity or law.
o An agent has a fiduciary relationship to their principal – confidential, trust and loyalty– duty of care – exercise skill, duty of obedience – carry out the owners instructions, duty of accounting – report monthly on funds/expenses and duty of disclosure – to provide information and keep owner informed of all facts relating to the management of the property
What are the key weaknesses in property management (as identified by Gibson 1994, Strategic Property Management) and how do they relate to the principal-agent problem?
o Reactive management - respond to issues as they arose; ad hoc decisions, no view to future value of the property
o Landlord vs tenants objectives – tenant wants to minimise cost of occupancy, landlord wants to enhance value of asset
o Lack of performance monitoring – no incentive for managers to use space efficiently, true cost of performance of operations not known
o Inadequate information – often insufficient or inaccessible to make decisions
o The Gibson article relates specifically to local councils and their roles as property owners – but are instructive for any PM. The issues relate to moral hazard and the principal-agent problem where agents act to a minimum standard, often not in best interests of owner.
Outline The Fundamental features necessary for a strategic property plan – Gibson
Specific targets should be set and measures of performance established as well as a monitoring and control system. To implement this it is necessary to have:
Information - in terms of the quantity and quality of property information available – ie Transparency and Disclosure
Understanding - understanding of property-related issues - arm- length transactions, compulsory competitive tendering for commercial properties – ie. Accountability
Evaluation - resources need to be managed in an efficient and effective manner. Measures or indicators of good or bad performance -accountability
Why bother with a Property Management Plan? Kyle Ch 2
Management plan – is the financial and operational strategy for the ongoing management of a property
Focus on:
o Owner’s Objectives – why do they hold the property and what do they want from it? Investor, govt, corporate owner
o Property analysis – specific property – physical attributes, neighbourhood analysis – zoning, facilities etc
o Market analysis – “big picture” analysis, economic influences, infrastructure, demography, S&D trends, vacancy rates, transportation
Key reason for owner, property and market analysis is to determine return on investment:
o Rental prices - income
o Costs/expenses – fees, rates, repairs
o Comparable income and expenses analysis – to determine payback time on repairs/improvements, whether necessary for property to remain competitive in the market
o Necessary info to formulate 12 month budget and 5 year plans
A property manager is usually a special agent
f
If the principal asks the manager to violate the law, the agent must do so under the fiduciary duty of obedience.
f
A property manager may commingle client funds with the regular office funds
f
Most managers will ask for at least a one-year management agreement
t
The owner and the manager should be named as coinsureds on liability and workers’ compensation insurance policies.
t
Fees charged to owners may be freely discussed by competing property management companies.
f
Most owners do NOT wish to be disturbed so annual reporting is generally sufficient.
F
Banks, colleges, and large corporations usually enter into an employer-employee relationship with the property manager.
F
The management agreement should indicate if the agent is permitted to sign binding leases.
F
The written agreement between the owner and the agent is called the listing agreement.
F
