Understanding Investors’ Goals Is Secret to Fee Management Success
- Jun 27, 2011
The keys to property management success include having an understanding of who composes the property’s ownership and what their goals are, as well as keeping ownership informed about their investments, said speakers at last week’s National Apartment Association Education Conference and Exposition in Las Vegas.
Speaking at a session titled “Learn the Secrets to Making Your Owner Happy,” Gary Hofstetter, president of New Boston Management Services Inc., explained that apartment property ownership can take many forms. These entities can be REITs, LLCs, sole ownerships, private equity funds and institutions. They share many of the same goals, and it is important for fee managers to understand what their requirements are.
The management agreement may be a good place to start if property managers want to obtain an understanding of aligning with the investor’s interests, says Hofstetter. The agreement will delineate, for example, reporting requirements, signing requirements and the length of the management agreement.
Real estate returns, capital expenses, economic occupancy, risk management and insurance, and exit strategy are all examples of subjects that are on owners’ minds today, says Hofstetter. There are four types of real estate returns: total returns, returns on equity, unleveraged returns and leveraged returns. Investors are more concerned about economic occupancy–which includes concessions and bad debt-than physical occupancy. Capital expenses can be funded through replacement reserves, requisitions to the owner or operations–or capital improvements may be deferred.
Kettler Management President Cindy Clare, another panelist, suggests that one of property managers’ top duties is to increase the value of the property on behalf of the owner. “Owners look to us to increase value,” she says. The reason increasing revenues and reducing expenses are so important to property owners is that they ultimately increase the value of the property.
Every increase in revenue or decrease in expenses makes a difference to the value of the property, says Clare. For example, a one-unit vacancy for one year, assuming a rent of $1,000 per month and a 6 percent cap rate, translates to a $200,000 loss in value.
Clare says how focused investors are on the revenues and expenses of the property may depend on their investment timeline. If the owner wants to sell soon, they may focus very intensely on the numbers, whereas if they are on long-term hold, they may not be asking about the numbers every day.
If fee managers want to raise rents, perform a renovation or spend money on advertising, it may be incumbent upon them to present their proposal in terms of the increased value it will bring to the property. The first step for managers in having a conversation with the ownership or asset manager is to be armed with the facts, says Clare. Property managers need to know their numbers and need to be able to back them up. “Ultimately, owners and asset managers are numbers people. If you cannot back up with facts, they will not pay attention,” she says.
Raymond van Beveren, head of the construction management services group at TVO North America, explains that property managers who are managing capital projects need to be qualified, organized, good communicators, and focused and goal oriented. Project managers should ideally understand the scope of the work and why it is being performed. No assumptions should be made, and they need to keep open lines of communication at all times with the general contractors, other managers, vendors and subcontractors. Lack of communication is the number one reason projects fail, says van Beveren. Owners want the project manager to make recommendations, be the “eyes and ears” of the project, and be “completely vested” in the project.
Speakers generally emphasized the importance of keeping owners informed. One of the most important duties that the property manager can perform for the owner is to fulfill the reporting requirements, suggests attorney Edward Gelles partner at Rappaport, Aserkoff and Gelles. Traffic and leasing reports, for example, allow investors to measure the performance of the property versus projections and adapt quickly to market conditions. Other types of reports are financial reports, incident reports and insurance claims, and rent collections and delinquencies. Critical areas of which owners need to be informed in a timely fashion are media attention, insurance claims, criminal acts and emergency responses, he notes.