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When to decentralize.

Regardless of the way you and your firm view decentralizing property management operations, decentralization has become a key issue for property managers. Two related issues are driving the trend toward decentralization: computer technology and competitive pressures. Gains in computer technology have made automated, onsite management economically viable.

Competitive pressures such as the shortening time frame property managers have to prepare monthly financial results, increasing competition in the industry, the decline in real estate development in many parts of the country, and pressures for property management reporting standards have forced firms to operate more efficiently to survive. Many firms look to on-site systems as a solution.

Between the two extremes of total decentralization and total centralization is a wide range of possibilities for the property management firm. How do you decide what is an appropriate balance for your firm?

Defining decentralization

The broadest definition of decentralization is moving all data capture and accounting functions related to a property to the property level, the source of the data. In practice, only a limited number of accounting functions are moved to the property level, since certain functions, such as accounts payable disbursements, require more control than can be maintained on site.

The lack of certain data, such as general ledger adjustments, at the property level, make it virtually impossible to produce property financial statements on site. As a result, most management firms decentralize tenant and lease management and cash receipting.

These functions may currently be centralized at your home office or may partially be performed manually on site at the property. However, the dramatic price decreases in computer hardware in the past several years and the increasing capability of computer software have created computerized, cost-effective management systems that can be installed on site at most commercial or multi-family residential properties.

As a result, we will focus on accomplishing the computerization of property management functions at the property level.

What functions should be decentralized?

Our experience with property management firms suggests decentralization consists of three distinct phases.

Phase I of decentralization normally consists of the following functions: tenant recurring billings, tenant lease management, tenant cash collection, tenant special billings and one-time billings, and management-related reports.

These functions are familiar to the on-site property manager. Many firms have utilized a manual pegboard system at the property site for years to track tenant recurring billings, cash collections, and special billings. Lease management information has been maintained in many forms: tenant applications, lease agreements, abstracts of lease terms, or card files. Tenant special billings and one-time billings are often easily automated, as many of these bills are the result of on-site activities, such as special services for a tenant.

Phase II of the implementation typically consists of traffic or marketing analysis and statistics and a work-order maintenance system. Most of this information has traditionally been captured manually at the property level. The property site is the source of all information for these systems.

Completion of the implementation process, Phase III, consists of the recording of accounts payable vouchers at the property site and the ability to record and track committed costs at the budget line-item level. This allows vouchers to be recorded immediately upon approval by the property manager, with the control over accounts payable payment retained at the central office. The committed costs capability allows the property manager to have a current snapshot of costs committed for each budget item during the month.

Most property management companies that have elected to decentralize have automated the Phase I and Phase 11 functions, but not Phase III. This may be due to concern regarding accounting skills at the site level, control issues regarding decentralizing part of the accounting function, and the limited number of software packages capable of providing these features.

Once familiar with the common phases of decentralizing, a management firm must question whether its size and property mix are appropriate for decentralizing.

Company guidelines for decentralizing

Company size. Any company that is managing more than 15 properties, regardless of the mix of commercial or residential, is a candidate for decentralization. The more regionalized the company, the more geographically dispersed the properties, the larger the properties, the more appropriate the on-site solution.

Property size. If you are justifying a system from the standpoint of efficiency and management information, any size property can experience success. Normally, commercial properties with more than 30 tenants and/or more than 100,000 square feet can easily justify the cost of an on-site system. For residential properties, sites with more than 150 to 200 units can justify an on-site system.

Type of properties. In our experience, more residential than commercial property managers have moved to onsite systems. Reasons include:

* Fewer tenants per commercial property versus residential property.

* More complex recurring billings in the commercial environment, including escalations, percentage rent, and pass-through billings. (These types of billings can be accommodated in most property management software systems, but are often the last function implemented. In many instances, billings may be performed by the accounting function versus the property management function, due to the amount of after-the-fact information required to produce an accurate bill.)

* Commercial management firms tend to have regional offices rather than offices at each property, making on-site systems more difficult to integrate in the current work flow.

* Commercial management firms can easily centralize cash receipting via a lockbox or central receipting function. Residential management firms may have an on-site property manager, with walk-in cash collection, in some parts of the country.

* More tenant turnover exists in a residential property versus a commercial property, resulting in additional transactions. This increases the amount of information and calculations required at the property level.

This is not to imply that decentralization is not viable for commercial properties. Rather, more thought and planning must be performed for commercial decentralization.

Type of management. For fee managers under intense pressure to produce complete property information for an outside owner by early to mid-month, moving on site may decrease the month-end closing cycle. Some of our clients have realized gains of one to three days in the closing cycle. These gains are the result of quicker recording of cash receipts and the ability to maintain the tenant information on line, eliminating any queuing of data at the central office.

In addition, more accurate rent rolls can be produced on a daily basis at the property as all tenant/resident-related transactions are recorded daily at the property level. On-site personnel also have more in-depth knowledge of tenant activity on a daily basis.

For owner-managed properties, the time frame for monthly financial statements, although critical, is not a drop dead date that could cause a loss of management contracts. For owner-managed properties, the incentive to decentralize is improved and more timely management information, enabling more effective operations.

Simply differentiating reasons to decentralize between fee management companies and owner-management companies is not adequate. Fee management companies managing for few owners are much like owner-managed companies in some ways: different reporting formats for rent rolls and financial statements are fewer in number, but timely reporting and accurate management information are critical.

A common constraint raised by fee managers concerns how to deal with the on-site computer hardware and software itself, i.e., who should own the hardware and license the software? Fee management companies may deal with this issue in several ways:

View the cost as an efficiency improvement, and absorb all costs through the management company overhead.

Let the owner purchase the computer hardware, and let the fee manager license the software as site licensees.

Lease the hardware and software on a site-by-site basis.

Asset managers and property owners have also begun to impact the decision process by selecting a property management software standard, required for all of their property managers. Using this approach, the asset manager or owner purchases the software for use by the third-party manager. The third-party manager is then responsible for training and implementation of the system, using the reporting guidelines established by the asset manager or owner. Firms under these guidelines are often forced to decentralize to gain the benefits of utilizing the selected standard.

Company organization structure The key to successful decentralizing is adequate implementation supervision by regional or district property supervisors and proper training for on-site managers. This requires an in-depth knowledge of the system and management reports by regional property management and accounting personnel.

In conjunction with adequate training, up-front planning and initial implementation are necessary to identify and test standards to be utilized at each property.

During the on-site decentralization process, the need for a project manager from within the organization to manage the entire process is imperative. The responsibilities of the project manager are to ensure the timetable for implementation remains on target, to plan and coordinate implementation-related issues, and to troubleshoot the hardware, software, and policy issues as they arise.

Typical costs. A recent Laventhol & Horwath survey' indicates that property management firms have incurred costs ranging from $2,000 to over 8,000 for an on-site property management system, including hardware, software, and training costs. These costs will vary by region and are to some extent dependent on the number of sites to be decentralized. These costs do not consider one-time costs such as conversion and central office training.

Cost justification. In analyzing whether decentralization is a fit for your company, the benefits must be weighed against the costs. What types of benefits can you expect to gain?

Our survey indicates the greatest benefits from implementing on-site systems, in order of most frequently cited, are: improving accuracy of data, reducing the amount of time required to process accounting information at the central office, and increasing the amount of management information available.

Other reasons cited less frequently include reducing the time required to process tenant information at the property and providing higher quality, more responsive service to tenants.

In establishing the cost/benefit quotient for your firm, it is helpful to quantify the benefits to be gained from each area impacted by decentralization. The benefits listed in the accompanying chart (Figure 1) can be used to focus on those applicable to your firm.

Most companies making a decentralization decision use many of the intangible benefits mentioned above in justifying their decision. Often, the decision is not merely a cost/benefit justification, but an issue of minimizing the frustration and data redundancy created by an inefficient and/or outdated system.

For companies interested in calculating the costs, benefits and payback period, the analysis is described in Figure 2. This analysis is based on a residential complex of 300 units with an average effective rental rate of $450 per unit per month or a commercial building of 135,000 square feet with an average effective rental rate of $12 per square foot, approximating annual revenues in both cases of 1,620,000 annually. As demonstrated in this analysis, payback is achieved in the short time frame of 2.8 months.

Implementation issues

A successful implementation is a joint effort of company, upper management, property management and accounting departments, and the hardware and software vendors. After your firm selects the appropriate hardware and software solution and develops a realistic implementation plan, two areas become critical: proper initial and ongoing training in the usage of your system and proper procedures to ensure adequate controls in your operations.

Training. Numerous training approaches are used by property management system vendors. Training may be conducted in an off-site location away from your office to allow your personnel concentrated immersion in the system. Training may also be conducted incrementally by application module (for example, general ledger, commercial management, and so forth).

Importance should be placed on training the property management supervisory personnel and the accounting personnel together on the property management modules of the system, because these personnel must work closely together in establishing the initial income codes, property information, and desired accounting results for each property. Ideally, property management supervisory personnel can then act as trainers for on-site property managers.

Using this approach, manual procedures specific to your company can be incorporated into the computer system training for on-site personnel, thereby clearly identifying all activities required at the property site.

Once initial training and implementation has been completed, periodic training sessions should be held for new personnel. These training sessions should be controlled at the property management regional location or central location, in order to avoid the common pitfall of the "train your own replacement" syndrome.

If training is not standardized and conducted regionally or centrally, new personnel learn only what the previous person was able to comprehend about the system. When this occurs, the knowledge about the system passed from one person to the next decreases exponentially, until no one at a site understands anything about the system, except what buttons to push and when they should be pushed.

Ongoing training should also be provided to all personnel when new software enhancements are released, normally at least once a year for most vendors.

Procedures. During implementation, company personnel should review manual and computerized procedures for all aspects of the system. Every system has unique aspects and capabilities that may require adjustments in company procedures or the development of new procedures.

A particularly sensitive procedure in all computer systems is backup. Backup must be performed daily and conscientiously. Backups should also be tested periodically to ensure they are functioning properly. Although this subject is widely discussed and highly emphasized, most companies must suffer a crisis in this area before the topic receives the attention it deserves.

Daily backup becomes even more important when property management is decentralized because each property site may be the only location of that property's tenant data. For decentralized processing, additional backups of each property's data should be performed biweekly, at a minimum, and stored centrally in a fireproof and waterproof location.

In addition, property management supervisory personnel should conduct surprise tests of backup data. Surprise tests can verify the backup is being performed properly and test the extent of knowledge of property management personnel in recovery procedures.

Other procedures that typically must be adjusted in a new system include: standards for setting up a new property, monthly income reconciliation process, special billing processing, and authorization and documentation of write-offs or adjustments to tenant balances. As the implementation is conducted, changes in procedures should be implemented at a few "test" properties initially, allowing time to adjust the procedures for unexpected situations.

Is decentralization right for your company?

Decentralization is not an all-or-nothing option. Some divisions of your firm may be a perfect fit; other divisions may not. These guidelines provide the core criteria for your decision. As advances in technology continue and performance pressures increase, a competitive advantage at the property site may become a necessity.

References

1. The Laventhol & Horwath study was conducted in the Dallas and New York City areas among a selected group of 100 property management companies. The results are based on a 30-percent response rate to the survey.

Sharon L. Taulman, CPA, is the principal in charge of information systems consulting in the Dallas office of Laventhol & Horwath. She is also responsible for the national sales and implementation of property management systems. She has over 12 years of extensive experience in systems analysis, programming, selection, and implementation of various minicomputer and microcomputer systems.

in the area of real estate systems, Ms, Taulman has participated in a firm-wide committee charged with evaluating real estate property management software. She has also assisted numerous clients in the selection and implementation of real estate systems.

Ms. Taulman received her B.B.A. degree in accounting from Texas A&M University and her M.B.A, degree in management from the University of North Texas.

DECENTRALIZATION OF PROPERTY MANAGEMENT

I M P L E M E N T A T I O N

* anticipate time to plan the implementation-this is often the most critical area.

* DO assign a project coordinator with responsibility and time to keep the project on time and on budget.

* DO start with a property geographically near you.

* DO implement your sites in phases.

* DO understand the property management reports on the system before you begin large-scale implementation.

* DO get standardized policies and procedures in place for the on-site systems using a few properties as test properties before the full-scale implementation.

* DO have well-trained trainers.

* DO take the time to do it right--a well planned and executed implementation that takes three to four months is better than a one-month disaster

* DO let your test properties run for one to two months before implementing the rest of your properties.

* DO start implementation with computer literate property managers.

* DO develop contingency plans.

* DO provide for periodic evaluation of the implementation and periodic retraining.

R E A S O N S T O D E C E N T R A L I Z E

Management

increase revenues

Improve cash flow

Increase occupancy rates

Improve services and present a professional image to tenants, owners, and investors

* Improve facilities management

* Strengthen litigation cases

Financial

* Obtain timely and accurate financial information

* Tighten expense controls

Productivity

* Increase productivity and provide for growth

SELECTING A SYSTEM

T H E R I G H T W A Y

* DO involve personnel from management, accounting, and property management.

* DO develop a checklist of major features you require for your system-every property management firm is not the same.

* DO differentiate between critical and non-critical features.

* DO assume that every software package is different. Take the time to understand conceptual differences.

* DO check vendor references of similar size companies and types of companies.

* DO determine what manual processes and control procedures may need to change as a result of automating decentralizing.

* identify areas where software is not a fit and plan how these areas will be handled: change procedure, change the software, understand how to work around the issue.

* DO determine the flexibility of the system-growth capability, report writer capability, interfaces to other commercially available software.

* DO investigate the software vendor-number of users, level of support assistance, quality of training.

* DO request each vendor to propose from the same information, with the equivalent configuration.

* DO plan to spend at least a month in evaluating alternative systems.

CENTRAL OFFICE BENEFITS

* Improved accuracy, as data does not have to pass from manual records at property to input at central office

Improved management information

Elimination of tenant lease setup, tenant recurring charges, tenant one-time and special billings, recording cash receipt of tenant payments

* More time to focus on financial statement analysis, internal controls, and special projects

BENEFITS TO PROPERTY

* Improved accuracy of data

* improved management information

* Real-time status of tenant balance,

* with detailed charges, payment history, ability to immediately reject payments for legal reasons

* More control over late charge assessments

* All tenant lease and payment information available at property site

* Ability to produce reports on site immediately, ranging from rent roll to vacancy listings to tenant history

* Ability to maintain changes to tenant lease information

* Tickler system to maintain important dates, tenant-related notes, special information important to property

BENEFITS TO OWNERS

* Faster turnaround on financial performance of property

* Higher quality, more responsive service to tenants

* Additional management information to aid the decision
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.

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Title Annotation:property management
Author:Taulman, Sharon L.
Publication:Journal of Property Management
Date:Jul 1, 1990
Words:3185
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