Selecting a property manager who will oversee investment real estate is an important decision. The first step that an asset manager must take when selecting a property manager is to analyze the needs of the property. Common challenges to consider in determining which management firm may be best for a property include:
- Location
- Leasing
- Redevelopment
- Tenant relations
- Performance
- Holding period
- Condition of the property
Location
Not every property is situated in an ideal location. Very often, properties were developed in locations with significant challenges. Examples include retail strip centers with limited traffic access and office buildings located on the periphery of business centers. Location problems are, by nature, difficult to correct. They require an open and creative mind that can develop an effective mitigation plan, such as creating new amenities or planning a change of use. One manager, for instance, took an anchorless retail center in Denver with limited access and turned it into a church with administrative offices.
Leasing
Leasing is a central concern to the viability of any investment property. Some firms exclusively offer leasing services; others, only management services; while still others offer both. It is certainly easier, from an asset manager’s point of view, to have one firm handle both functions. However, if your property has a significant vacancy rate, you may wish to engage a leasing firm that can give you the kind of immediate attention that a major leasing effort requires.
Alternatively, if there are physical problems with the property that exceed the capabilities of most firms, you may wish to award the assignment to a specialized firm for repairs and let a more traditional firm handle the leasing.
If separate leasing and management firms are selected, the asset manager assumes the responsibility to make certain that there is sufficient communication and cooperation between the two companies. Problems can occur in many cases. For example, a leasing firm might make promises that the management firm is unaware of, or the management firm might fail to maintain the property well enough for the leasing team to meet objectives.
Redevelopment
Depending on its age, location, and neighborhood, a property may be a candidate for redevelopment. A redevelopment opportunity may include working with publicly funded redevelopment agencies (RDAs) in addition to the traditional sources of new equity and/or debt financing. Working with RDAs is a highly specialized area that requires an understanding of public funding and the responsibilities that RDA directors have toward their governing body. Therefore, a publicly funded redevelopment calls for a specific kind of manager. Redevelopment opportunities that are not in defined redevelopment areas, which can benefit from available public funding, should be managed by a firm with more traditional project management skills.
Tenant Relations
Tenants are everyone’s clients, and without their rent, a real estate investment has no economic value. Since a property manager has more contact with tenants than the rest of the ownership team, he or she is better positioned to positively influence tenants. Thus, tenant relations are an important issue to consider when selecting a property manager.
If a property has been acquired through foreclosure or if prior ownership has not managed a property well, there could be significant tenant relation problems that need immediate and direct attention. Typically, this requires a property manager who has experience in these situations, where sensitivity and responsiveness can defuse tensions caused by the neglect of a previous owner.
Performance
A property may be under pressure because of poor returns. In this situation, an asset manager should seek a property management company that has the creativity to develop and implement a plan to address issues identified in the business plan. The solution may be as simple as determining where and how to cut operating expenses without upsetting tenants or causing potential damage to the property. Or perhaps a property’s desirability can be enhanced through aesthetic upgrades or improvements to tenant relations, thereby increasing the potential market rent. Creative ways to pro-duce additional income opportunities must be explored, such as adding storage or leasing parking space to outside customers. The objective is to improve a property’s net revenue-generating potential to create a higher return on investment.
Holding Period
In some cases, asset managers seek property managers who can assist a property during a relatively short hold period—typically, six to 12 months. There are several reasons why investors might plan a short-term holding period. It may be that the investor has more important objectives and that the asset is only a piece of a larger strategy. It may be that the acquisition was unintended (for example, a foreclosure), and there is no interest in actually holding title to the property. It could be an opportunity to acquire a property at a discount, reposition it, or otherwise correct existing deficiencies, and then flip the property for a quick gain. Whatever the circumstances, short-term assignments are typically not as profitable as long-term investments. Absent special considerations, the owner and asset manager won’t expect the property manager to be much more than a caretaker.
Condition of the Property
Some properties have significant physical plant problems (for example, HVAC, elevator, or lighting) or problems with tenant services (for example, cleaning, security, or parking). These situations require skilled engineering and maintenance staffing that can address and correct these problems in an efficient and economical fashion. Other properties may have relatively few problems, but nevertheless have extremely complex and/or sophisticated buildings. An analysis of the property’s unique needs is critical. This analysis—whether formal or informal—must be designed and executed in such a way that the asset manager can use the data to develop specific goals. Examples of specific goals include:
- reaching 90 percent occupancy within 18 months
- reducing operating expenses by 15 percent
- renewing four key tenants during the next two years
Once the goals are established, the asset manager will identify the skill sets required to achieve these goals. This will help the asset manager evaluate prospective management firms and, later, determine how well a firm is performing by comparing achievement to the original goals.
This article is adapted from BOMI International’s course Asset Management, part of the RPA and FMA designation programs. More information regarding this course or the new High-Performance certificate courses is available by calling 1-800-235-2664. Visit BOMI International’s website, www.bomi.org.