This chapter goes over the nuts and bolts of managing and leasing and helps you answer these questions: Is it better for you to self-manage or hire professional management? Should you choose a larger or smaller management company? What are the methods property managers use to steal from you? What are the questions you should ask when screening management companies? How do leasing objectives differ between landlords and tenants? What are your leasing objectives? What are some of the mistakes you should avoid when leasing?

SELF-MANAGEMENT VERSUS PROFESSIONAL MANAGEMENT

I have clients that rave about their property management companies. These commercial investment property owners team up with their property managers. They seem to almost finish each other's sentences. You would think they were best friends.

Yes, there are exceptionally good property management companies out there that pride themselves on quality and excellence. They have killer maintenance and accounting software that is state of the art. They even have online portals for owners that make everything transparent. Say it's 1:30 in the morning and you want to know if unit 16 has been rented yet, or if building B has been scheduled for painting, or if the range has been replaced in unit 28. You can check for yourself in minutes. Fees range from 4% for office properties to 10% of gross rents for small multifamily properties under 24 units. See property management fees (Topic J, Managing and Leasing). These top-notch property managers often put in 55 hours per week or more and some have heart palpitations.

But the majority of my clients complain about their property management companies performing poorly. They say they just do not seem to care about running the property profitably. That they make endless excuses for not staying within the budget after agreeing to run things lean and mean. That they are lazy about getting vacancies rent ready. That they seldom get multiple bids on major repairs. That the cost for these repairs ends up being much more than they were told. That financial reporting is often chaotic—and worse yet, downright confusing. That rent rolls are not updated until requested, and financial reports have entries that cannot be explained.

Many of my colleagues and referral sources are real estate brokers that own property management companies. Boy, do they give me an earful. This does not seem like a fun job. One of my favorite property managers told me about the time they had the unpleasant job of going out to a large apartment complex after a call from a hysterical tenant. They got there just in time to stop a neighboring tenant from sacrificing a lamb in the front yard for a religious holiday. They tried to explain that the children next door would be traumatized if they carried this out. The offending tenant argued that in America you are allowed to practice your religion without interference, then asked where the rule was in writing to forbid this.

Not that I want to take sides, but property managers are the busiest people I know and my experience is that most are honest. Are they really going to risk their property management and real estate license by stealing from property owners? Some do! You will get to read about 11 ways property managers can rip you off a little later in this chapter. Property management employees are some of the lowest-paid professionals in America, earning on average less than $28,000 per year. One thing that is obvious: property management is not a cost-effective business. There is just too much to do in too little time for the pay. Maybe this is why so many have to take shortcuts.

Property managers are on the phone a lot—screening tenants, supervising vendors, and talking with owners. They are responsible for making vacant spaces ready to rent. Sometimes this means negotiating on tenant improvements, overseeing all new floor and window coverings, or even reconfiguring dividing walls. Property managers are the ones who get to harass slow-paying and no-paying tenants by sending them threatening notices. And God forbid, sometimes they have to go to court to evict them. They are responsible for all repairs and maintenance, including landscaping and snow removal. And often they have to mother employees and vendors to get jobs done. And let's not forget negotiating leases, paying all the bills, and monthly financial reporting to owners. For a complete list, see management duties for commercial property managers (Topic J, Managing and Leasing).

Seven Essential Property Management Skills

If you are going to self-manage your commercial property, the following are the top skills needed. Do you possess these?

1. Customer service. Do you have the ability to treat each tenant with respect and to make them feel special? They are your customers. Being a good listener and making each tenant feel as if you care about them and getting their issues resolved is important. Say a potential tenant just does not like the gray industrial-grade carpeting in an office space. They want you to pay to replace it with beige carpet. You might tell them that grey is not your favorite color either and offer to split the cost with them.
2. Problem solving. So a retail space has a leaky roof and it is ruining merchandise. Your maintenance guy has replaced a section of the roof, but now the water is dripping in another place eight feet away and also dripping on the tenant below. It's your responsibility to get this problem solved. Will you be relentless in doing so?
3. Mothering tenants, employees, and vendors. Are you good at supervising? So you have left many messages for an apartment tenant saying that they cannot store an extra refrigerator on their deck. They ignore you. So you send them a written notice telling them they are in violation of their lease and have a week to cure the problem or you will be starting eviction. Or the vendor you are renting the laundry equipment from has not repaired the two broken washing machines out of the four you have and it's been over a week and you have called the company many times. Your tenants are complaining. You threaten to cancel the contract with the vendor, report them to the Better Business Bureau, and give them an unfavorable rating online.
4. Financial management and budgeting. You have a budget for all expenses and are going over on some. So you find ways to lower them. You also plan to raise some rents, which will help you to hit your target numbers.
5. Multitasking. In one day you have to meet with three contractors to get bids for resurfacing the parking lot, showing a space to a new tenant, and giving written and verbal notice to all tenants that an appraiser will be walking through their spaces. You also need to get payroll done and get caught up on accounting entries.
6. Negotiating. A high-quality tenant wants you to pay for major leasehold improvements but does not want their rent increased to the level it needs to be to pay for it. They also want their rent waived for the first three months of occupancy and tell you another landlord has offered this deal. With the two months it will take for the improvements, this will give you five months without any rent on the space. Can you work out something that is fair to both parties?
7. Marketing. It's competitive out there. You have several empty spaces and are not getting a good response on Craigslist. As a commercial property manager it is your responsibility to do marketing. Do you have a knack for this?

IS A LARGER OR SMALLER MANAGEMENT COMPANY BETTER?

If you are going to purchase an apartment complex with more than 8 units or a multitenant commercial property and you live beyond driving distance of the property, you will be better off hiring a professional management company that is located within an hour's drive of the property. These firms make it possible for you to have a life and will be able to be Johnny-on-the-spot faster than you can be.

It is a rule of thumb for multifamily properties that it is just not cost effective for a commercial property management company to manage fewer than 24 units, which results in higher fees for these smaller properties. There are national and regional management companies that manage 30,000 units or more for hundreds of clients. They are often in a position of doing the best job just because economies of scale permit them to hire more help. They usually have the latest software that makes accounting and maintenance very efficient. But they are picky. Don't be surprised if you find them screening you. These firms prefer Class A, B, and great-condition C multifamily properties of 60 units or more. One of the best benefits is that these large companies almost never steal from property owners. There are just fewer opportunities to do so. The downside is that you'll end up working with many different staff members and the continuity of major projects can be less efficient.

Many of my clients swear that their small mom-and-pop management companies that manage under 3,000 units give them service that far exceeds that of the large companies. Most of these smaller firms are owned by commercial real estate brokers who are sharp on keeping up on market rents and are the best at keeping your rents at the top of the market. And when you are ready to sell your property they are the best at selling it. After all, they know it inside out.

MANAGING YOUR PROPERTY MANAGER

Remember that property management is an overworked, underpaid, and underappreciated industry. It seems like many companies only have time to give topnotch service to owners that bug them. So you will get astoundingly better results if you are willing to manage your property manager. Think of it as having a partner and co-managing your business with them.

Unless you own a triple net lease property, there is no commercial property that is truly a passive investment whose owner just has to sit back and get paid. Sorry for the cliché, but it is the squeaky wheel that gets the grease. Be that squeaky wheel. Be sure to email or call your property manager once a week. Do this early in the morning to put your property on their plate first. Remember that they work for you. Ask for their opinions about how you can add more to the bottom line. Then give them your ideas. Set goals with them for marketing and occupancy. Hold them to these goals. Make sure they have someone showing vacant units on weekends. Get excited with them about perspective tenants and how best to negotiate a lease with them. Get involved with reviewing bids from vendors and subcontractors, and especially with lease negotiations and resolving issues with problem tenants.

It will cost you if your manager takes shortcuts on these items. Some office, retail, and industrial property tenants that go into default on their leases are experts at stalling eviction. Their attorneys can stall the process for a year or more. Your involvement can cut this time in half. Make a list of what the management company is excelling at and compliment them on it. Make another list for areas for improvement and communicate these respectfully to them.

ELEVEN WAYS PROPERTY MANAGERS CAN RIP YOU OFF (AND I'M SURE THERE ARE MORE)

As mentioned, in my experience most commercial property managers are honest. Some might push the envelope and engage in some questionable but legal practices to increase their profits. It would be much better if they informed you if they were inflating the cost of work done by vendors or getting kickbacks from them. Actual theft occurs when a property manager uses schemes to siphon off a little cash here and there. This is downright embezzlement and it is a crime. Here are 11 of the most popular ways property managers rip off property owners:

1. Embezzlement. This is the most serious, and unfortunately most common, form of property management theft. Embezzlement is an art. It takes a very creative, entrepreneurially minded individual who gets a high from figuring out ways to get something for nothing to do this. Most are smart and difficult to catch. There are over 20 methods. Here are nine of the most common:
   1. Stealing cash payments. A tenant pays the rent in cash and the property manager keeps the money. They then show the unit as vacant on the books.
   2. Skimming rents from a few tenants. The property manager has a few tenants deposit their rent in a bank account that neither the tenants nor the owner know is controlled by the property manager. These units show up as vacancies on the rent roll.
   3. Falsifying the rent roll. The property manager steals several months' rent or more by indicating that a tenant moved out earlier than they did. The property manager then falsifies the rent roll to show the unit as vacant and funnels the stolen funds into an account they control.
   4. Showing paying tenants as delinquent. Accounts receivable show tenants as being behind on rent when they actually paid on time. Eventually the “delinquent” rent is shown as bad debt. Again, the funds are funneled into a bank account controlled by the property manager.
   5. Making payments to a shell company for services not rendered. The property owner does not know that the property manager owns the business in question.
   6. Being in collusion with a third party vendor. The vendor bills the management company for a service or product that was never provided to the property. The vendor retains half and gives the other half to the property manager.
   7. Cooking the books. Accounting software is manipulated to eliminate rent payments or show false payments for expenses to legitimate accounts. The funds are then funneled into a bank account controlled by the property manager so that accounts payable and accounts receivable match.
   8. Raising rents and stealing the increase. The rent roll is not updated to show the increase and the excess funds are then syphoned off to the property manager.
   9. Running a Ponzi scheme. Funds from other properties are funneled into the property's operating account to hide theft when the owner realizes that the operating account is low and cash in does not match up to cash out.
   • Remedy: Embezzlement is a statutory offence and punishable by a lengthy jail sentence. If the offender is really good at what they're doing, it will take a forensic investigation of the accounting software to uncover it.
   • Require that all rent payments be made by auto payment or on the property's website. Make sure that you have online access to the property's operating accounting software and bank account and monitor both of these weekly. Watch out for unreasonable delays in the deposit of rental income. Look for unrealistically high expenses or an unexplained drop in net operating income, as well as less gross rent being deposited in the bank than shown by occupancy on the rent roll.
   • Look out for expenses that always exceed budgeted amounts. Be wary of property managers that will not commit to setting a budget for expenses. Set a limit on how much a property manager can spend without your approval. If there are a lot of expenses just under that limit, be suspicious.
   • Check vendor invoices monthly. Be wary of vendors that have a post box address instead of a street address on their invoices. Look out for many payments made to one vendor. Occasionally call third party vendors and question them about the work they performed. Chances are they will not know if theft has occurred, but they will tell you if they never did the work. Check with the secretary of state's corporation division online and find out who owns the vendor's company. If it is the property manager, then you need to dig deeper to search for fraud.
   • Be wary of property managers who get defensive or evasive when you ask them about discrepancies in accounting statements, such as when accounts payable are not in balance with accounts receivable.
2. Vendor kickbacks. The property manager colludes with a vendor to bill a higher amount than the actual cost of services. The vendor then cuts a check back to the property manager for the difference or does free work for them. This is a grey area and is very difficult to detect. It is almost never found to be illegal.
   • Remedy: Occasionally get a quote from vendors for a similar job for a make-believe property and see if they quote you a lot less. Better yet, get involved with getting quotes from vendors—especially on expensive work.
3. Stealing security and cleaning deposit money. This is actually stealing from your tenants and involves overcharging them for cleaning fees or damage and then pocketing the difference—or billing the tenant for damage they did not do and keeping their damage deposit. In both cases the deposit is shown as refunded on the books.
   • Remedy: If the property manager makes a habit of this, tenants will give bad online reviews or file a claim in small claims court. If this is a reoccurring practice, you should be suspicious.
4. Charging a fee above actual costs for vendors. This is an acceptable practice if disclosed to the property owner. Some management companies charge a fee of 10% or more for arranging for work to be done outside of their payroll when requested by the owner.
   • Remedy: Ask your property manager if they are marking up services preformed by their staff or third party vendors. If they have not told you about this practice, tell them this is not okay with you since you were not notified of the practice.
5. Buying hardware, equipment, or supplies and returning them. The property manager simply buys items for the property and then returns them for cash, which they pocket.
   • Remedy: This is very difficult to detect. Watch out for supplies being purchased frequently, and if the outlays seem high, be suspicious.
6. Stealing laundry and vending machine money. Taking a portion of this money is not difficult.
   • Remedy: Purchase or lease vending machines that take only credit or debit cards or have laundry and vending equipment owned by third party vendors that give you a cut.
7. Comingling funds. A property manager pays your bills out of their company account and then gets reimbursed from your property operating account. This is a system that is ripe for skimming. Or they put security and cleaning deposits in their property management business account. They can then more easily steal money from the tenants without your being able to monitor the transactions.
   • Remedy: All property income should only be deposited in a segregated property operating account that the property owner also signs on. All expenses for the property should only be paid out of this account. Tenants' security deposits and cleaning deposits should always be kept in a separate account or in a client trust account. The property owner needs to have online access to these accounts and closely monitor them.
8. Stealing your tenants. Sometimes property managers are offered a bonus if they can fill one of your competitor's new apartment complexes quickly. Offering your tenants a rent concession to move to a nicer, newer property is stealing your tenants, but not illegal.
   • Remedy: If you notice that many of your tenants have left around the same time, do some investigative work. Always get tenant phone numbers from the property manager. Tell them that you want to check with the tenants every so often to see if they are being well taken care of. Phone the tenants that have left and ask they why they moved. Most likely they will be honest and tell you they were offered a better deal by your property manager.
9. Filling your property with poor-quality tenants. Some property managers are just plain lazy and do not screen tenants for credit and background adequately. Or they offer rent concessions that are not needed but help them fill vacancies quickly and easily, such as paying only half of the first month's rent when the tenant signs a year's lease. This can cost you a lot of money in poor rent collections and property damage.
   • Remedy: Get your property manager to agree to get your authorization for any rent concessions if they feel they are necessary. In addition, get them to email you a copy of the tenant files showing signed leases and a copy of the tenants' credit and background reports, along with notes on rental references that were checked.
10. Buying supplies for their personal use. When shopping for supplies for your property at a store like Costco, the property manager buys many items for their personal use.
    • Remedy: Ask the property manager to turn in copies of their receipts for supplies. If they are overbuying legitimate items or purchasing items that are not for the property it will be easily detected. Be suspicious if they keep telling you that they lost receipts.
11. Stealing from a petty cash fund. When the office petty cash fund keeps dwindling with no explanation, this is a sign that the office employee is helping themselves. Often they will claim they used it for a legitimate expense but forgot to write it down.
    • Remedy: Get the property manager to agree to account for all cash expenditures and to provide you with copies of receipts.

In conclusion, the best way to prevent property management theft is to have online portal access to the accounting system and to question the property manager about entries that you do not understand. You should also look at their reconciliations with bank statements. This way they know you are looking at their books continually. Be sure to do weekly backups of the accounting to your personal computer and the cloud. Let the management company know that you will be conducting periodic audits.

TWELVE SCREENING QUESTIONS TO ASK WHEN CHOOSING A PROPERTY MANAGEMENT COMPANY

These days, the best property managers want to market their software technology for serving tenants, their expertise in performing maintenance, and their transparency in property accounting to attract clients. Be sure to meet in person with the manager or owner of the management companies you are interested in. Then put them on the spot by asking them these 12 questions:

1. What property types do you specialize in and how many units do you manage? Does the management company have extensive experience in your property type? What asset class do they like? How many units do they manage? Many property management companies specialize only in apartment buildings, others only in office, retail, or industrial. And some manage every commercial property type. Many of the national firms will only take on larger Class A and B and excellent-condition C properties.
2. What are your qualifications? Are you licensed and/or accredited? Most states require the owners of property management companies to be licensed real estate brokers, but some states do not require any licensing. There are various accreditations. Being a certified property manager (CPM) from the Institute of Real Estate Management is the most highly regarded accreditation, and it is not easy to qualify. Review the bios of owners and top staff to see that they have education, training, and accreditation. Ask them for four references from satisfied clients.
3. What are your fees? Ideally you want to choose a company that just charges you a fair percentage of gross rental income and doesn't nickel-and-dime you. Some charge a standard monthly fee per unit, others a flat fee plus a percentage. It is standard for office, retail, and industrial properties to charge between a half and a full month's rent when leasing a unit. Some multifamily management companies that specialize in small complexes of 12 and under also charge this. Ask them if they mark up any third party services, and if so by how much.
4. What services do you provide? These should include marketing, tenant quality control, tenant relationships, market rent research, leasing, accounting, maintenance, and construction. For a full description of these services, see Management Duties for Commercial Property Managers (Encyclopedia Topic J, Managing and Leasing).
5. What accounting services do you offer? Ask what is included in monthly reports. The best management companies have a portal on their website that you can go to that offers full transparency 24/7 for accounting, including rent rolls, profit and loss statements, accounts payable, accounts receivable, and bank reconciliation accounting.
6. How do you manage budgeting during good times and during a recession? This is a really important one. What is their procedure for budgeting rental increases, expenses, repairs, and capital improvements? They should provide you with an annual budget pro forma. Do they monitor the budget monthly and inform you of any changes or explain why adjustments need to be made? In the event of a recession, what actions do they take in terms of lowering rents, lowering expenses, and offering concessions to keep the property running profitably?
7. What is your maintenance program? How do they monitor repairs and routine maintenance as well as preventive maintenance? Do they have an online portal for this? What software, if any, do they use to track repairs and routine maintenance? Do they use their own maintenance staff or use vendors? Do they get bids from vendors and contractors and communicate these to you? Do they ever get kickbacks from them? I know the last is a touchy question, but if they don't take kickbacks they will be proud to answer it.
8. How do you handle rent and/or CAM (common area maintenance) charge collections? Ideally you want to have rent collection set up so that tenants can make payments online at a tenant portal on your property's website. Another good option is autodraft from the tenant's checking account.
9. Do you offer a biannual market rent analysis? They should provide an analysis of the rents of your competitors and update you on market occupancy and absorption rates.
10. What is your purchasing process? Do they competitively shop insurance, maintenance supplies, and equipment? Or do they mostly do business with companies they have a relationship with?
11. How good are you at tenant relations? What tactics do they use for negotiating leases and lease renewals? What is their process for handling tenant maintenance requests and complaints? How do they communicate with tenants? Do they have a portal on the property website that tenants can go to? How quickly do they respond?
12. How good are you at marketing? Why are they the best at marketing? What do they do to improve the image of your property when marketing it? Do they use a marketing plan, and if so, what are the components? Do they provide a website for your property? Does it have software that automatically posts vacancies to the website? Do they post vacancies to popular real estate listing websites such as Craigslist, LoopNet, Apartments.com, HotPads, and Zillow? What type of rental concessions do they typically use and under what circumstances do they use them?

LEASING BASICS

Have you thought about how diametrically opposed leasing objectives are for landlords and tenants? Understanding the tenant's side can really help you with lease negotiations. When you start negotiating a lease with a tenant, will you know what all of your leasing objectives are? This section mostly pertains to leasing office, retail, and industrial space.