What You Should Include in Your Property Management Agreement

1. Introduction

Professional property management firms can help relieve the day-to-day aggravation of management. In many instances management firms can even improve property cash flows to more than compensate for their fees. Unfortunately many owners have had bad experiences with management firms.

The main reason for the bad experiences is that owners often neglect to do a good job in selecting management firms. Worse than that, owners forget the fact that just hiring a management firm is not the answer. Owners have to work with their property managers. Owners have to set goals and objectives for their properties and review results from operations on a regular basis. With the right type and amount of interaction by the owner, property managers can become a valuable asset to the owner.

The Property Management Agreement is the key document that the owner should use to govern the employment and measure the performance of a management company. All too often an owner mistakenly lets the management company dictate the language and terms used in this agreement.

2. Provisions

What follows in this article are provisions that we believe are essential to a good management agreement. They are not all inclusive but rather are the ones that you definitely want to make sure are included within your agreement.

a. “Walk-Through” Report

Within 30 days of the effective date of any agreement, the Management Company should be required to furnish the Owner with a written “walk-through”report detailing the rental status and condition of each unit with recommendations for repairs and cost estimates for such repairs. Prior to initiating the “walk-through,” the Management Company should be required to submit for approval from the Owner a copy of the unit data gathering forms as well as the summary report format.

b. Marketing Plan

Within 30 days of the effective date of any agreement, the Management Company should be required to furnish the Owner with a written Management and Marketing Plan. The Plan should include staffing requirements, comparable rental data, target markets and a description of the ideal tenant profile.

c. Written Leases/Rental Agreements

All tenancies should be pursuant to written lease/rental agreements on forms, for lease terms and at rental rates approved by the Owner. Any rent concession marketing programs should be discussed and approved by the Owner.

d. “Shopping” Reports

The Management Company should be required to periodically (at a minimum every three months) evaluate the marketing skills of their leasing/rental staff. The Management Company should take appropriate action based on quantitative and qualitative results of such evaluations. The Owner should have the right to review and instigate such evaluations.

e. Cost of Services

The Management Company should not mark up the cost of outside services and materials. The Management Company should promptly rebate to the Owner all profits, fees, rebates and any other value received directly or indirectly from any person or company furnishing any type of service or goods to the Property.

f. Budgets

In order for the Owner to anticipate and plan for the cash requirements of the Property's operation, The Management Company should submit to the Owner, within thirty (30) days after execution of any Agreement, and in a format approved by the Owner, an annual cash budget including recommended capital expenditures.

Thereafter, in successive years, the annual cash budget should be submitted to the Owner no later than sixty (60) days prior to the commencement of each calendar year.

g. Accounting

The Management Company should maintain in its office, accurate, complete, and separate records in accordance with generally accepted accounting standards and procedures, showing income and expenditures relating to the operation of the Property, and from which accounts payable and accounts receivable, available cash, and other assets and liabilities pertaining to the Property can be readily identified and the amount thereof determined at any time.

h. Right to Inspect

The Owner should have the right at any reasonable time through his attorney, accountant, other representative, or in person, to inspect the records kept by the Management Company pertaining to the Property, including, but not limited to, all checks, bills, invoices, statements, vouchers, cash receipts, leases, rent rolls and tenants lists, correspondence and all other records dealing with the management and operation of the Property.

The Owner should have the further right at any time to conduct an audit of all account books and records pertaining to the management and operation of the Property.

i. Reporting

The Management Company should furnish the Owner on a monthly basis:

A balance sheet, general ledger, and a detailed statement of all receipts and disbursements, such data to be furnished on or before the tenth (10th) day of each month for the preceding month. Such statement's header should clearly identify the true calendar dates and period being reported on. Such statement should show the status of collections and should be supported by canceled checks, vouchers, duplicate invoices, and similar documentation covering all items of income and expense, which should be kept in the Management Company's office and be available for inspection of Owner's representatives at all reasonable times.
The Management Company should also furnish monthly operating statements showing the income and expense for the month and year to date and for the same portion of the preceding year. Such statements should compare the actual income and expenses to the submitted and approved annual cash budget for the same month and year to date. The Management Company should make every effort to account and report separately for expenditures undertaken to repair or maintain rented units versus down units.
The Management Company should also furnish monthly a narrative report that describes the general state of the property. Such narrative should explain any significant differences between the actual income and expenses and the budgeted amounts. Should the Management Company be using a cash basis accounting system, the narrative should then be used to account for delinquent rents. Specifically to identify: delinquent rents outstanding in the beginning of the month; current month delinquencies; recoveries of prior month's outstanding; as well as any write-offs taken and the status of any legal action taken to recover lost revenues. The narrative should also be used to highlight and discuss current vacancy numbers, note any changes in the market and identify any new marketing efforts undertaken or needed to fill vacancies.
The Management Company should be required to transmit such monthly reports using a transmittal letter. Such transmittal letter should be dated and signed as “read, verified and approved” by the various persons responsible for the direct management and accounting of the property.

j. Confidentiality

The Management Company should agree that all knowledge and information relative to the Property obtained by the Management Company during the course of the Agreement should be kept strictly confidential and should not be disclosed in whole or in part to anyone or used by the Management Company for any purpose, except in connection with the Management Company's carrying out its duties and responsibilities.

All materials, information and documentation relating to the Property in the Management Company's possession should be returned to the Owner immediately upon any termination of the Agreement. The provisions of this paragraph should survive the termination of the Agreement.

k. Independent Contractor

The Management Company and its employees should at all times act as independent contractors.

After reading this article we highly recommend that the Owner review their management agreement and identify which, if any, of the above provisions are omitted. If any are omitted, then we suggest that the Owner reflect on his or her past experiences and see if incorporating similar provisions would not improve their confidence in future operations.

RealTax professionals have the knowledge and expertise to make sure the appropriate provisions are included in your management contract. We specialize in real estate oriented accounting, tax planning, tax preparation and related services. We invite you to contact us with regard to your specific needs.