Property Management - Self Managing

The concept of ‘self managing’ a commercial property may make sense in certain situations.  If you have the ability and resources to provide the necessary services for the property, there is no reason you shouldn’t consider managing the property on your own - and pay yourself to do so.

What might this look like and are there issues that need to be addressed?  As with professional management, it needs to include the first 3 elements – Asset Management (AM), Financial Management (FM), and Physical Maintenance.  Since you are the owner,  the AM/FM component becomes more of an internal exercise, as you are basically accounting (reporting) to yourself.  Tenant communication is probably the biggest key, and you should attempt to provide it a level which is comparable to professional management. That doesn’t mean it needs to be overly complicated and detailed – but rather efficient, clear, and easily understandable. On the leasing function, you may opt to involve a real estate brokerage to handle new leasing placements.  In this scenario, you might retain the responsibility of negotiating any new deals, lease preparation, and completing any work required to deliver the space.

Bear in mind, you are wearing a lot of hats in self-managing. You need to do a good self assessment to ensure you are up for the task.  In preparation, consult with your professional advisors (lawyer, accountant, & of course r/e broker) to make sure you are able to deliver the service needed on all counts.

Should you pay yourself – ABSOLUTELY!  There is no such thing as 'Free Management’ and it should be costed at levels consistent with whatever is typical in your market. If done properly, it is often a  ’win-win’ for owners and tenants, given the vested interest both have in the property.

Again, seek out experienced commercial realtors within your  market to discuss prospects on ‘self-managing’ your property. 

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.      

Property Management - What Sort of Costs/Fees?

It’s a great question – but one which is not simple to answer. In reality, there is no universal management fee structure. Just as commercial properties vary from location to location and market to market, so to do the related costs to manage these properties.

Factors to consider should include:

·        Size of the property and total # of tenants

·        Types of tenants – commercial/medical/retail/office

·        Projected maintenance requirements – based on prior years

·        Projected capital improvements pending (ie. new façade/roof)

·        Type of Financial Management required (ie. proformas/budgets)

·        Vacancy Status (management needs differ w/ high/low vacancy)

·        New Lease Involvement w/ Placements & Marketing

·        Historical Cost to manage the property (minimum 3 years)

Your best fee comparisons are done locally in your own market, making best efforts to find similar type commercial properties. Interviewing a minimum of 3 management companies is a good strategy, ensuring that you establish the same criteria for each proponent  -- comparisons need to be “apples to apples”.

In our local market of Windsor-Essex (Canada), if I had to provide a range for management fees, it would likely fall in the area of 3-5% (commercial properties only, not multifamily) of the total gross revenue.  Again, services offered may differ from company to company and you need to ensure you are making valid comparisons. As well, this would not include any ‘new leasing’ related services, which would be the responsibility of a related real estate brokerage.

As always seek out the advice of experienced commercial realtors within your market, as you look to establish a good management plan.     

Property Management – Do I Need It & What Does It Look Like?

If you acquire a commercial property which requires a certain level of management, what should you expect or look for? It will very much depend on what you specifically require and in most cases, you should be able to find providers who can tailor services to meet your needs.

Typical services would include the following:

• Asset Management – on going communication with the owner, preparation of proformas/budgets, tenant relations coordinator
• Financial Management – collection of rents, manage receivables, accounts payable, operating cost billings, monthly statements, procure bids for insurance
• Physical Maintenance – property inspections, perform regular maintenance, repairs & improvements, 24/7 avail., supervise hired contractors, manage projects
• Leasing Placements – coordinate all new leasing activity (in conjunction with r/e brokerage), screening of prospective tenants/credit investigations, tenant set-up

Most professional management services will tailor a package based on the services you require – in short, a menu driven approach where you select what you need. A lot will depend on where the property is located (relative to where you reside), and what sort of time/resources you can devote to any of the above management categories.

Just a final comment on well managed properties. They usually are occupied by content (dare I say – happy) tenants, which generally makes for a more successful investment property.  Keep this very much in mind, as you structure your management plan.

As always, seek out experienced commercial realtors within your market to assist and guide you on the best management solutions available.

Rental Property Investing - Mixed-Use Properties

Another category that you will encounter in most markets, is the ‘mixed-use’ (MU) variety. By definition, this is a property that has a combination of both residential and commercial units. Typically the commercial are the lower floors (most often the ground level), with the residential component above.

In your own neighbourhoods you may have seen this type of real estate, but never having taken a view of them from an investment perspective. Let’s consider in what the advantages/disadvantages might be:

Advantages:

·    Income is diversified relying on both commercial & residential demand

·    Traditional downtown cores were conceived in this fashion

·    Design suits commercial users wishing to reside in apartments above

·    Built-In Business support for commercial tenants from the residents

(particularly in larger complexes)

Disadvantages:

·   Tenant needs can be different/unique, creating potential conflicts (ie. noise)

·    Mortgaging challenges (many lenders avoid this category)

·    Restricts the type of tenant (for either component), which you can attract

·    Physical issues as they might relate to parking/signage/basement access (being more of an issue in the case of larger complexes)

   

Is it a good or bad potential investment? As always it depends on many factors – but best practice is to do your homework (due diligence) and the answer should become clear.  Beyond looking at the financial details of the properties (ie. lease details/expense summaries), take a hard look at the neighbourhood, taking note of how many other MU properties are within the immediate area. Do they appear successful and well occupied? Are MU properties more or less the building standard on the street(s). How do the comparables look and with what sort of market time?

We are moving on from our review of  ‘ property types’…. next up management issues and considerations in buying commercial properties.  As always, seek out experienced commercial realtors within your market to assist with reviewing potential MU investments.

Press Release - Windsor Star April 4, 2013

FOR IMMEDIATE RELEASE

Local RE/MAX Team Lalovich Ranked #12 in Commercial Real Estate Sector

Mark and Russel Lalovich of RE/MAX Preferred Realty Ltd. have been ranked #12 in the International RE/MAX Network for Top Commercial Teams.  This honour is not one bestowed lightly. It goes to highlight the hard work and dedication to providing quality client service and a clear focus on promoting Windsor Essex as the place to find commercial real estate for expanding businesses from across Canada.

This Father and son team focuses on developing a broad client base that in the past year has included many commercial property seekers from Alberta and Saskatechewan.  Mark Lalovich attributes the success to his expertise in the market and his ability to create win/win situations in commercial negotiations.

“We have definitely benefitted from the out of town clients, including investors and commercial tenants alike  and see this trend continuing as the region continues to improve economically” says Mark.  He and Russel continue to post to their blog Commercial Real Estate 101, which also features videos of commercial properties that are current listings to assist potential clients in understanding available listings as well as get a sense of who Mark & Russel are, and how to work with them.  “Tapping into technology is the beginning of reaching other audiences, helping them to start a relationship with us while establishing us as an expert team in the local market” says Russel.  “The feedback we get on the blog, posts and especially the videos is really great. We know we are developing a following”. 

Glen Muir, Broker of Record of RE/MAX Preferred Realty stated “Team Lalovich continues to be the go-to group in our market, creating the opportunity to be recognized in this way.  They provide the highest level of professional service to investors, tenants and landlords alike in Windsor-Essex.”

RE/MAX has over 89,000 Sales Associates, in more than 6300 offices operating in more than 80 countries around the world.  Both Mark and Russel will be recognized at an awards ceremony later in 2013.

Rental Property Investing - "Non-Performing Properties"

Is buying a ‘Non-Performing Property’ (NPP) as an investment a good idea?  Well that depends on a couple of key factors – primarily what type of re-development plan for the property do you envision – and how do you plan on financing it in the interim? Suffice it to say, this type of investment is higher risk, but potentially with a higher reward/upside.  

Consider the following examples:

·            Plaza with 50% vacancy

·            Vacant Commercial Building

·            Distressed Property Requiring Extensive Rehabilitation

·            Commercial/Industrial Land Site

·            Institution Lands (previous school or church)

·            Bank Sale (Foreclosure/Power of Sale)

In all of these cases, there is either no cash flow, or less than there should be.  Cost to carry properties is a serious consideration, and you need to factor it in for a period of transition – say 6 months to renovate a building for a new user.  In the case of a multi-unit development, you may also face a further holding period - assuming it takes another 6-12 months to find the right tenancies.  Cost to carry is a major part of your Due Diligence, in analyzing NPP opportunities.

If you are owner-occupant/user, looking at this type of real estate may make a lot of sense, given the value they can offer.  Re-purposing of NPP over the past few years, has been a popular theme in challenged markets across Canada.  By definition, this type of property continues to lose money daily for the current owner (Seller), and the Buyer leverage should only be strengthened in any purchase negotiation.

In every market, there are investors who make their living in this category and do so successfully. Take the time to not only examine these properties, but the background  of what was required to make them viable investments.

As always, seek out experienced commercial realtors within your market to assist in reviewing potential NPP investments.  For an example of a current NPP we have listed, please click here.