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Negotiating the management agreement.

Negotiating the Management Agreement

Negotiating a management agreement is similar to other areas of real estate management - to do it well you must be prepared, and you must do your research. Before you begin the negotiation itself, you need to have a clear picture of what you will be negotiating and with whom you will be negotiating.

Preparing for the negotiation

Before you meet with the owner, you should do some initial research. Begin by finding out who is the decision-maker. If you jump straight into writing a proposal, you may be wasting your time. And you may have missed your opportunity.

Once you identify the decision-maker, you need to learn what the goals and objectives are. If an owner is going to hold a property for two years and then sell, and your management agreement presentation calls for long-term strategies, you are probably in trouble.

Your first meeting with an owner should be devoted primarily to building rapport. This is your chance to get to know each other and hopefully begin a friendship. Ideally, this first meeting should take place in an informal setting, such as a breakfast or a lunch with mutual acquaintances.

Even though the general intent of the meeting should be casual, try to gain some insights into the owner's ideas of the property. Take the opportunity to ask some open-ended questions, such as "What are your ideas for the property?" or "Have you developed a renovation strategy?" Sometimes, these types of questions will get the owner to come to terms with what he or she wants to do with the property. In some cases, your questioning many be the first time that the owner has focused on these issues in any detail.

Even at this early meeting, research can be helpful. Prepare for your "small talk" by learning about the owner's personal interests. This background makes conversation easier. If you are not a good spontaneous talker, practice your small-talk skills and prepare some topics of conversation ahead of time.

Keep in mind that the first meeting is not for selling. You are there to get to know the owner and learn as much as you can about what he or she wants in a property management company.

Research - phase two

If the first meeting goes well, and you feel that the owner's ideas coincide with the services you could provide, you should plan a second meeting. Before the second meeting, however, you need to learn all you can about the owner and the property. The more you know, the better chance you have of planning a successful presentation that responds to an owner's needs. Before this meeting, be sure you have:

* Inspected the property. An old property management adage says that to be successful, you need to know more about the property than the owner does. Otherwise your agreement will not really reflect the condition of the property and you may find that the job requires much more work than is covered by the fee you requested.

* Visited competing properties. Speak to the on-site staff and determine where this property fits into your portfolio of managed accounts.

* Found out what the owner's reputation is in the community. If possible, speak to the property staff, as well as vendors and those that work with the owner in other businesses. Learning about the owner's reputation and work habits will help you know what to expect in your own working relationship. The results of these interviews may also give you an idea of whether or not this will be a beneficial relationship.

* Found out what the owner expects from you. Knowing the scope of the owner's management plans will help you set your fee. Also learn how often the owner wants to meet with you and what type of reporting he or she requires.

The second meeting

Having done your homework, you are now ready for the second meeting with the owner. At the second meeting, you will be making your formal proposal presentation. That proposal, or the management plan, is based on your assessment of the owner's goals and the property's needs.

At this meeting, you need to highlight your solutions to problems you have seen on the property. You should also answer any questions the owner raised during the first meeting, as well as the ones the owner did not raise, but which you think are important. Spend some time training your staff and yourself in giving good presentations.

Your proposal will restate what you think the owner's goals are now and in the future. This restatement allows the owner to understand that you are totally aware of his or her objectives. At the close of the presentation, you may give the owner the budgets, reprints of articles, company brochures, and all the other collateral material you have. Use these as visual aids. Remember, most people are visually oriented and showing them what you can do is often more effective than telling them or having them read it.

Fee structures

In preparation for scheduling the third meeting with the owner, you must establish a management fee or other compensation you plan to charge. There is no standard fee. However, there are two basic types of fee structures - percentage and flat. Your fees should be based on a cost accounting of your management operation. You have to know what it costs you to be in business and what your cash flow needs are. Only then can you decide on the best fee structure.

In part, the selection of a fee structure depends on the owner's objectives and the current condition of the property. For example, a small, minimum flat fee versus a percentage of gross rents may be appropriate for a medical office building that is in good physical shape and is fully leased. On the other hand, a senior citizens apartment building that is undergoing renovation and is empty may demand a flat fee only in the beginning. When this renovated property is 60-percent leased, the fee may be shifted to a percentage fee.

You should also include other applicable areas of compensation or cost reimbursement when setting percentages or management fees. A few might include:

* rent or lease-up fees,

* special accounting,

* special banking/cash management,

* refinancing,

* photocopies and postage,

* express mail and messengers,

* long distance phone calls and fax transmissions,

* court time/legal depositions,

* construction renovation,

* feasibility studies,

* consulting, and

* payroll administration.

Lastly, many owners may agree to financial incentives that are built into the management agreement if you present the incentives in the right light and the incentives are not cumbersome to monitor. Show the owner the benefits of including incentives.

The third meeting

The third meeting is the point at which you actually negotiage the management agreement. At this meeting, you must again demonstrate how you are going to solve the owner's underlying problems with the property.

Your proposed management agreement must address the owner's plan. Repeat to the owner what he or she has told you should be done with the property. Point out places in the agreement that address these concerns. You should also explain how you will achieve these plans. Reinforcing the owner's goals underscores your commitment to achieving those goals.

Your management agreement must also highlight what is unique about your organization. For example, if your company will adapt its accounting reporting format to an owner's chart of accounts, put that in the contract. In this way, you do not have to "sell" your company. The agreement sells the services you are offering to deliver.

If you plan to use your financial statements as selling tools, be sure that the owner understands them. Probably 50 percent of what a property manager does is reflected in the financial statements and similar reports. If an owner is not detail oriented, you may have a problem in highlighting your financial reporting systems.

Decide who will be reviewing your statements and reporting the results to the owner. He or she may recognize or appreciate the reporting format you are proposing and relay that to the owner. Having a third party, who the owner trusts, help sell your management is a definite plus.

Conducting the negotiation

The negotiation of the management agreement should not be emotional. Draw on the issues and show how you will solve problems. Use words like "the agreement says," rather than "I say." This keeps the discussion neutral and non-personal.

If a negotiation bogs down over language, shift the discussion away from actual verbiage to the intent of the agreement language. Once the intent is acceptable, you only need to negotiate the exact words.

Try to answer a question with a question. The owner should do the talking, and you should do the listening. Lastly, be creative. The management agreement that sets you apart from the competition is often the successful one.

In preparing the terms of the management agreement, leave room for give and take. If you have done enough research, you should know what points the owner will negotiate for or against strongly and which issues will be of lesser importance. Decide in advance what concessions you are willing to make during the negotiation. Such preparation assures that you will end up with a document and a fee structure you can live with.

This technique does not imply that you should add too many "nickel and dime" items to the agreement just for the sake of negotiation. However, having a few throw-aways and being prepared to give in on some points is good initial planning.

If possible, you should try to negotiate that contract with the owner, alone, just one on one. This does not suggest that your legal counsel should not review the final language of the agreement. A legal review is essential. However, a one-on-one negotiation is appropriate if the discussion focuses on the terms of the agreement rather that the detailed verbiage of the final document.

Ideally, the negotiation should take place in your office or at least in a neutral area. Psychologically, you are more comfortable on your own turf. In addition, you can control the environment - if and when you are interrupted, what to do when the coffee runs out, and so forth. This gives you a negotiating advantage.

If you do hold the negotiation in the owner's office, which is often the case, try to establish some ground rules up front. Establish with the owner how long the meeting will run, or establish a specific time (perhaps two hours). Agree you will not be interrupted during that time. By setting the rules in advance, you are demonstrating leadership and confidence.

Trends in the

management agreement

More owners are moving the management of their properties in house rather than hiring a fee manager. Owners need the cash flow from management. They also like the additional sense of control with in-house management. A property management department may be one way to keep good personnel on payroll when development or other areas of the business are slow.

As competition increases, more and more fee managers have to adapt to owners' accounting formats. If you can adapt to other charts of accounts, you are ahead of many firms. Some institutional owners are also developing their own management agreements and financial accounting packages. They are expecting fee managers to implement and maintain them.

Portfolio managers who act as buffers between the owner and the fee manager are becoming more common. These managers are not limited to larger companies. Smaller owners with a few buildings are beginning to hire portfolio managers.

Management agreement negotiations are becoming more legally technical with the inclusion of hold harmless clauses and other legal provisions. Negotiations are becoming tougher and fee managers are being held accountable.

Two-year management agreements, with a one- or two-year option, are still quite common. Fees are relatively stable; but as rents go up, managers who have negotiated a percentage of rental income are receiving greater compensation. Finally, competition among fee managers is stronger than ever before.

One way management companies are meeting this competition is by offering other services - leasing employees for janitorial, landscaping, space construction, interior design, and so forth. These extras help management companies make the profit that they now have trouble realizing from just the base fee. These added services also benefit the owner.

A final note

A successful management relationship has its foundation on a successful negotiation of the management agreement. You must devote a great deal of planning and research into developing your agreement presentation to the owner. The agreement must be specific enough about the owner's goals, yet flexible enough to allow you to do what you must. Finally, an agreement should include adequate compensation and allow adequate time to do the job right.

Remember, getting the account is only part of the goal in negotiating a management agreement. The other part is getting an account you can keep.

John N. Gallagher, CPM[R], senior vice president of IREM's Education Division, is vice president and director of property management for Shannon & Luchs Co., AMO[R], a full-service real estate firm headquartered in Washington, D.C. He has had numerous books and articles on property management published by leading trade publishers. Mr. Gallagher is a member of IREM's Academy of Authors and received the 1987 JPM Article of the Year award.
COPYRIGHT 1989 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Gallagher, John N.
Publication:Journal of Property Management
Date:Sep 1, 1989
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