Property Management - Who Pays? Where is the cost shown?

A couple more good questions – and the simple answer is, it depends on the type of lease agreement(s) in place on the property.  Are we dealing with net lease agreements, whereby the tenant pays all operating costs associated with the property (TMI). Or are they gross or semi-gross lease agreements, where the tenant pays a set/specified amount irrespective of the operating costs associated with the property. If you are not sure, take a close look at the lease agreement(s), to determine the exact type of lease that is in place.  

In the case of a true net lease agreement, the tenant typically pays the cost of the property management through an additional rent charge – commonly known as TMI (taxes, management/maintenance, insurance). Management is clearly reflected in this ‘acronym’, and the associated cost forms part of the additional rent.

In the case of a gross lease agreement, the landlord typically pays the cost of the property management out of the total gross rental(s) received. It may or may not be adequately covered for in the gross revenue figures – but it must be accounted for, when you determine the true net income figures.

You may encounter a variety of hybrid leases within your market – ie. customized in between a true net lease and a true gross lease – but in the end, you need to determine how the lease(s) provides for management expense and who is ultimately paying. 

A few final caveats in this area –

·        Ensure statements provided are consistent the leases in place

·        Net Lease Tenants can challenge non-competitive management costs

·        Lending Institutions will apply their own management cost factor (which may be inconsistent with costs provided with the property)   

As always seek out the advice of experienced commercial realtors within your

market, as you analyze the relevant management costs associated with the

property investments you are considering.