Management Agreement - Primary Concerns

A real estate management company has three primary concerns regarding the management agreement – payment for services it renders, reduction of its risk, and specifics of operating the property.

Payment for Services

Pricing of property management services cannot be totally determined by statistical analysis of certain factors. An element of strategy – reacting to potential clients and their needs – must be present. However, every pricing plan must include serious consideration of certain elements.
Compensation

The management fee is only one of several fees that can be charged for a variety of services provided by a management company. Seldom is there a dispute regarding the payment of the basic management fee; however, problems can arise regarding fees for additional services.
The typical management agreement will list specific duties of the manager, including:

• collecting rents
• paying expenses of the property
• maintaining the property
• reporting to the owner

Usually, the agreement will also list “other services” that are to be provided by the manager and the separate fees to be charged for them. These other services might include:

• maintaining corporate or partnership books
• performing special surveys
• undertaking or supervising major remodeling
• leasing
• brokerage
• refinancing

If an arrangement between an owner and agent calls for “other services” that are beyond the scope of the basic property management services and not specifically listed in the agreement as “other services,” a clause providing for these “other services” should be added.

It is important to understand that the property owner and real estate manager may disagree on which services are outside the realm of basic property management. To minimize the potential for misunderstandings, consider the following actions:

• Survey other firms to determine the basic management services provided for a specific type of property.
• Ensure that the written agreement is as specific as possible regarding “basic services.”
• Discuss the respective expectations of each party during the negotiation of the agreement.
• Clarify the level of service desired by the owner. (Note that not all clients seek the same level of property management service.) Ask the following:

1. What level and degree of service does the property owner require?
2. What level of property management expertise is required to meet the owner’s demands?
3. How much work (time) is required at the property because of its size and management problems?
4. How much time will be required for the owner personally?

Length of Contract

The second concern relating to fees is the length of the contract. The time commitment to initiate a new property management account, formulate a management plan, and implement the plan is considerably greater than the time commitment necessary to maintain and fine-tune an ongoing management situation. For this reason, the manager wants to receive a commitment from the owner of a sufficient term that will enable management to make money.

Failing to receive a term contract should result in a change in the pricing structure. The manager will need to negotiate for at least one of the following options:

• a higher monthly fee
• a start-up fee
• extra consideration for the heavy time commitment required during the early months of the contract

If a long-term contract is negotiated, the manager should take precautions against early cancellations. It is important to be compensated for the additional work required to set up a management account if the agreement is terminated early. For example, if the agreement is terminated during the first year, there should be provision for a cancellation fee to be paid to the management company. The amount should be negotiated and stated in the agreement. (This may be a formula based on the time period over which services were provided and the agreed-to management fee.)

Risk Reduction

Another issue management company’s have to face is their potential liability for others’ actions. Management company executives will want the owner-client to indemnify the management company against lawsuits relating to activities or incidents at the property that are either beyond the company’s control or are not included in the specific duties
of management.

To address this concern, the property owner may be asked to include the management company as an additional named insured party on the insurance policies for the property and agree to inclusion of an indemnification or hold-harmless provision in the management contract. A hold-harmless clause, or indemnification clause, within a management agreement states that the property manager cannot be held responsible for any liability over which he has no control. In this respect, the agreement should require that the property owner who has retained the services of the management company must maintain an insurance policy covering general liability for bodily injury and property damage.

This is one of the most difficult provisions to negotiate satisfactorily, especially for small management companies. Many sophisticated owners of investment real estate – banks, insurance companies, REITs – are likely to balk at some inclusive indemnification language. The owner may expect the manager to be included in such responsibilities and insist that indemnification language include a reference to the manager’s duties. For example, the manager might be indemnified to the extent that he or she performed all assigned duties in a competent and professional manner. If the manager were not to perform in this way, liabilities and problems could arise putting both the manager and owner at financial and legal risk. Most owners do not want a manager held harmless for incomplete work, incompetence, or illegal actions.

Operational Issues

The primary operational concern is whether the property owner has (or will make available) sufficient funds to operate the property. Maintenance being deferred and contractors not being paid on a timely basis can affect how a property is managed and how it is perceived in the real estate industry and the local community. These factors can have a negative impact on the management company’s, as well as the property’s reputation. Payment concerns can also affect the property’s and the management company’s credit standing.