Printer Friendly

Analyzing property management performance.

The institutional investor has very specific reasons for holding commercial real estate as part of an investment portfolio. Real estate has a long-term cycle and is an excellent complement to stocks and other security instruments, leveraged buyouts, and other more volatile investments that make up the bulk of an institutional investment portfolio.

Although it has become an industry trend to have approximately 10 percent to 15 percent of an institutional portfolio invested in commercial real estate, this does not necessarily translate into institutional investors having the expertise, hands-on knowledge, or time to manage these investments directly.

Managing commercial real estate is a very time-intensive, multi-faceted business. An institution often hires an asset management company that is charged with overseeing some or all of its commercial real estate assets.

As it is the responsibility of the asset management firm not only to maintain but to enhance the value of the entire portfolio, they are faced with the herculean task of dealing effectively with different types and qualities of property, different market dynamics, different levels of demand, and different goals for performance.

The asset management company is forced to take a macro, or broad-based, perspective because their responsibilities encompass an entire portfolio. They do not have the time or manpower, nor is it their function, to manage property by property, on a micro level.

Enter the property management firm. It is extremely common for asset management companies to contract out the on-site and day-to-day property management and leasing responsibilities for their assets.

The third-party property management firm can be selected based on a number of criteria: experience with product type, research capabilities and awareness of market, reputation, market presence, and potential conflicts of interest because of existing responsibility for competing properties.

Once a management firm has been selected, the question then remains, "How does the asset manager monitor the effectiveness of the management/ leasing firm's performance of the functions for which it is responsible?"

Property management consists of the marketing/leasing, financial, and operational aspects of a project. The asset manager is entitled to require the kinds of information he or she feels are necessary to monitor the progress and efficiency of the firm in these functions.

Marketing/leasing

Occupancy levels are a major factor in the financial success of a property. Leasing agents must not only fill a project, but also adhere to leasing guidelines that were created to ensure the financial integrity of the property.

The best way for the asset manager to begin monitoring leasing efforts is to make sure that the guidelines laid out in the management/leasing contract build a solid, yet market responsive, foundation for the leasing team's efforts. These guidelines give a standard point of reference by which to measure performance, on a lease-by-lease basis if necessary.

Among the provisions an asset manager should include in a leasing contract are:

* The rental rates and expense stops that are acceptable.

* The number of months of free rent that will be allowed per year of the lease term.

* Whether or not free rent may be taken up front or must be blended into the rate throughout the lease term.

* What the building's standard tenant improvement (TI) pac how overstandard TI will be handled.

* Acceptability of lease assumptions and moving expenses.

* Methods of calculating commissions for in-house and outside brokers.

* Terms for options, terminations, and penalties.

Once these guidelines have been set, the asset manager must work with brokers in maintaining the agreed upon standards. Frequent phone conversations and site visits every four to six weeks if the property is located out of town) help the asset manager build rapport with brokers.

The contract guidelines are important benchmarks for the asset manager, but they must not be treated as if written in stone. A property's leasing agents are continually working the market and participating in lease transactions, so they are aware of market and economic changes. Their initial input is necessary in order to create realistic, market-compatible leasing guidelines.

And if a drastic market change takes place (e.g., a major employer pulls out of a market, a construction moratorium is passed, or a new developer enters the market), it may be necessary for the asset manager to seek their input again if amending the leasing guidelines is warranted. The asset manager should review any lease proposals that may fall outside the guidelines with agents and discuss possible exceptions.

It is also important not to restrict leasing agents so much that deals cannot be made in a project. Often the calculations that pencil out on paper are the numbers from transactions made in an "ideal" marketplace. An asset manager must be aware of balancing between the returns on investment that an institutional investor requires and those returns the realities of the market will allow leasing agents to accomplish.

The asset manager will probably track the actual leasing transactions completed on a monthly basis. This is easily accomplished through the use of a one-page marketing report that can be submitted one week after the end of the month. The first portion of the report has a section listing signed leases, leases out for signature, proposals out for consideration (including a brief comment on the status of progress), and lease surrenders.

The second portion of the report lists the total square footage of the building, leased square feet gained, leased square feet lost, and square feet out for proposal. Also listed are the square feet leased as of current month and the corresponding occupancy percentage, the square feet leased as of last month and the corresponding occupancy percentage, and the change from last month to current month.

A standard form (Figure 1) can be made up by an asset manager and required for each property.

Thus far, we have focused on the timely and frequent collection of information about the property itself. In addition to measuring leasing performance, the asset manager must remain abreast of how the property is competing in the market. No piece of commercial real estate exists in a vacuum.

An asset manager should work with leasing agents to develop the competitive inventory" of a property. How big are competing projects? Where are they located? When were they built? What is their occupancy level? What are the asking rates at these projects? What are the effective rates of actual deals being made? Have any of these properties sold recently, and if so, to whom and for how much? What new construction is coming online?

These are questions that a property's leasing agents and property managers should be able to answer based on their research and their awareness of the market in which they are competing. This type of information should be updated on a quarterly basis. A competitive inventory gives the asset manager data to compare the performance of his or her project with others in the market.

Financial

Monitoring the financial expertise of a property management firm starts with the submission of a property's annual budgets. These should contain a projected lease-up schedule that supports the budgeted income stream, as well as projected operating expenses, owner expenses, and capital expenditures.

Budget information should be prepared on both a month-by-month and an annual basis, and a narrative should be included that explains any unusual or large capital expenditures.

Additional information that is extremely helpful to the asset manager concerns the market in which a property operates and the properties that are in direct competition, a marketing plan that states the property management firm's strategy for achieving its projected lease-up, and basic floor plans showing the location of current tenants and vacant spaces.

Formal approval of a budget will usually be given to the property management firm in the form of a written letter to be signed by both parties, with a copy for each party's files.

In order to track how closely a firm is coming to achieving its budgeted goals, the asset manager must make monthly financials a necessity. A monthly financial package should include the following statements.

Profit and loss. This statement should be designed to show budget vs. actual on both a monthly and year-to-date basis, including the variance.

The P&L should also be supported by a narrative of two to three pages. This narrative can be broken into an income section, an expense section, and a management section. The narrative can explain major income or expense variances, unusual operating or capital expenses, percentage rent schedules (appropriate for retail), and any operational issues that may have been dealt with that month (landscaping, replacement of lobby carpet, and so forth).

General ledgers posting lists. General ledgers show what the sources of income were and how money was disbursed for expenses. Not only does this provide in-depth backup for a P&L, it is something that every sophisticated management firm should be doing as a matter of good accounting practice.

Sources and uses of funds. This is simply a listing of contributions by or distributions to the owners.

Monthly tenant summary. This statement breaks out the charges each tenant owes (base rent, CAM, percentage rent) on a monthly basis. It can also be set up to show the amounts a tenant might be in arrears and what specific charges the tenant is not paying.

Aged delinquency report (accounts receivable). The aged delinquency report is an extremely important tool for an asset manager to use in monitoring a property management firm. It provides an excellent indication of how skilled a firm is at collecting monies owed.

An aged delinquency report should be carried out to the 120-day-plus time frame. If it appears that delinquencies are increasing or the collection period is lengthening, the property management firm needs to track business levels of certain tenants and to institute or revamp a late-charge policy. The management firm may also need to pursue legal courses of action.

Accounts payable. A monthly A/P listing allows the asset manager to monitor how efficiently and effectively the property manager is spending money to run the property. The financial success and return on investment of a property is not guaranteed just because it is leased up and in good operating condition. A property management firm should be conscious of how money is spent, the operating efficiency of the property, and the timely collection of funds owed to the landlord/owner.

Depending upon the size of an asset account, requiring the property management firm to use specific accounting software is certainly a negotiable point.

Tenant improvement draw requests. This report is done on an as needed" basis when tenant improvement TI) work is in progress at a project.

Using the TI estimate that was arrived at during the leasing transaction, a TI draw request form (Figure 2) lists the original budget for the job and any adjustments that have been made to that budget, the revised budget, the previous draws for specific jobs, the current draws for specific jobs, the job-to-date draws, and the balance remaining in the budget for that job. The layout of the request form can be determined by the asset manager and standardized for all properties.

Each time a TI draw request is submitted, it should be accompanied by copies of every work invoice for which funds are being requested. In addition, the property manager and asset manager should both be required to sign off on a letter of certification, which states that the work was completed as funded.

A site visit to the project is necessary to view the work in progress before a draw request is funded. Such a visit may be an opportunity for discussion and feedback from both sides as well as a way to foster an open rapport and good will with the property managers. The asset manager may also use this visit to study competition in the area.

Operational

The asset manager can stay abreast of the operational aspects of a property through information submitted by the property manager and through information he or she has acquired during site visits. The asset manager's physical presence at a property is important because it helps keep the property manager accountable and because it increases the asset manager's own familiarity with the property.

Quarterly performance report. This report deals strictly with the operational aspects of a property. Because the asset manager wants to enhance the value of the investment rather than just maintain it, the property is being handled operationally.

The quarterly performance report may be broken into as many sections as are appropriate for a specific property. Some suggestions for sections include:

* Tenant relations problems and successes.

* Lobbies and other common areas.

* Building exterior.

* Replacement of equipment and fixtures.

* Quarterly inspections and maintenance.

* Regular review of contract service.

* Landscape and signage.

Two to four pages are all that is necessary to cover these issues. The quarterly report can be the precursor of more detailed reports or discussions about the necessity of renovation, major expenditures on deferred maintenance, buy or sell decisions, and other major issues.

Site visits. Site visits should be made at least once a quarter, but not necessarily at the end of the quarter, when the property manager may be compiling information for his or her quarterly report. Halfway through each quarter is a good schedule because it gives the property manager an opportunity to implement any changes suggested by the asset manager and be ready to report on their results.

The site visit should be an opportunity to walk the building from top to bottom with the property manager. The following areas should be reviewed:

* Quality and appearance of the landscaping.

* Appearance of parking areas (striping and condition of asphalt).

* Cleanliness of lobby and corridors; inspection of walls for possible repairs.

* Review of annual safety check on elevators.

* Cleanliness of bathrooms; inspection of tile work and fixtures for necessary repairs.

* Inspection of building's structural integrity (particularly important in earthquake-prone areas).

* Inspection of the HVAC system and its procedural manual.

Inspection of the sprinkler and alarm system and its annual safety check.

* Annual inspection of roof.

During a site visit, the asset manager can also review the insurance claims history of the property. This review operations that need attention. The tenant complaint log is another source of information which may indicate repeated problems. This log may also enable the asset manager to monitor how responsive the property manager is to the tenants and the operational problems of the property.

The asset manager should also review the property management firm's policies and procedures manual, looking for accuracy, completeness, and timeliness.

Conclusion

Monitoring how effectively and efficiently a property is being managed need not be a complex task, if the asset manager lays out clear guidelines and reporting requirements for the property management firm. As long as a property management firm knows exactly what is expected of it, the firm can honestly assess its capabilities for accomplishing the asset manager's goals. The asset manager can leave the negotiating table confident of the personnel he or she has chosen.

Keeping the lines of communication open, not only by paper trail, but through frequent telephone contact and site visits, is also essential if the asset manager expects to maintain a productive relationship. Property managers and leasing agents are professionals. They are the keys to having a financially successful, operationally sound property. But they must know the full picture to be successful.

Mary Kay Brooks-Liberator is an asset administrator with Alex. Brown Realty Advisors, Inc. Her primary responsibilities include analytical work, assisting with the asset management function and being the focal point for information gathered for the asset plans of each of the 12 properties the Portland, Oregon office oversees.

Ms. Brooks-Liberator is the editor of the IREM Oregon-Columbia River chapter newsletter, and she contributes columns and articles on a regular basis. She graduated cum laude with a B.B.A. degree in marketing from Idaho State University.
COPYRIGHT 1990 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Brooks-Liberator, MaryKay
Publication:Journal of Property Management
Date:Jul 1, 1990
Words:2640
Previous Article:The process of REO management.
Next Article:Landscaping as a marketing tool.
Topics:

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters