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Chapter 8 – Property Management

In this lesson we review basic residential and commercial property

management concepts. The key elements of the HAR Standard Rental

Agreement and Property Condition form are discussed. Management

of retail, office and other types of commercial properties is reviewed.

Real estate property management attempts to balance the needs of a

property owner with those of a tenant.

A property manager managing residential properties is subject to the

Residential Landlord-Tenant Code. This law does not apply to

industrial and commercial real estate rental agreements, but does

apply to cooperative apartments and residential condominium units,

where management and maintenance of the property is essentially

the same as for an apartment offered for lease, except for advertising

and negotiating for tenants.

Residential rental agreements could be written or oral. The Hawaii

Association of Realtors® residential rental agreement may be used by

Realtors® or any other persons who wish to purchase it. Its use is not

required by the Real Estate Commission.

The two most common tenancies are fixed term and month-to-month.

With a fixed term rental, rent cannot be increased before the end of

the rental period and the landlord has no right to terminate the

agreement during the rental period unless the tenant fails to pay rent

or fails to comply with the terms of the rental agreement. With a

month-to-month rental agreement, the landlord can increase the rent

or terminate the agreement at any time with a 45-day notice. The

tenant may terminate the agreement with written notice no less than

28 days before the anticipated termination date. A 120-day written

notice is required if the unit is to be voluntarily demolished, converted

to a condo or changed to a transient vacation rental.

The Landlord-Tenant Code limits the amount of all deposits to no

more than one month’s rent. This includes the security deposit and any

deposits for keys, pets, or anything else.

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A security deposit may be used to remedy tenant defaults for

damages, failure to pay rent or failure to return keys; to clean the

dwelling unit, or to compensate if the tenant wrongfully quits the

dwelling unit. To retain any portion of a security deposit, the landlord

must give written notice of the reasons, itemizing all costs, within 14

days.

The Hawaii Association of Realtors®’ Security Deposit Statement shows

all deposits held by the landlord, and all charges the landlord is

claiming, itemized for such items as cleaning, pest control services,

repairs and replacements, unpaid rent, uncollected late charges and

uncollected interest, with a balance claimed by the landlord or due

the tenant. This or a similar notice, along with any portion of the

security deposit remaining, after deductions, must be given to the

tenant within 14 days after the termination of the rental agreement. In

order to limit disputes over the landlord’s right to claim any part of the

security deposit, the Code requires that the landlord provide a written

inventory describing the condition of the premises and any furnishings

and appliances, prior to occupancy, and give a copy to the tenant.

The Hawaii Association of Realtors®’ Property Condition Form can be

used for this purpose.

Neither the rental agreement nor the Code requires a final inspection.

However, an inspection is the best way to prevent disputes. HAR’s

Suggested Checklist for Vacating Tenants can be used for this purpose.

A landlord has the right to consider the unit abandoned if the tenant is

absent for more than 20 days without written notice and has not paid

rent for that period. He has the right to enter a unit, with at least two-

day notice, in order to inspect it, make repairs, decorate, supply

agreed services, or show the property to a prospective buyer, lender or

purchaser. He may terminate the agreement after giving notice, if the

tenant fails to either pay rent within five business days or to correct a

violation of the rules or damages within ten business days.

In classifying retail centers, a strip center is normally small in size, with

a convenience store as an anchor, for a trade area of the immediate

neighborhood; a specialty center usually lacks an anchor tenant, and

contains unique or specialty boutiques; a neighborhood center

typically contains 15 to 20 stores with one anchor tenant, and is

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supported by a trade area of up to two miles from the center; a

community center will normally contain 20 to 70 stores and two or

more anchor tenants, to serve a trade area extending out to around

three miles; and a regional center has up to 1,000,000 or more square

feet with several large anchor stores and an assortment of other

businesses for a trade area extending 10-15 miles.

Three common types of percentage leases are percent-only, variable

scale, and minimum percentage. This last type of lease is typically

found with larger, anchor tenants.

In an office building, the gross area is the total sum of all of the area

within the outside faces of the exterior walls; the gross rentable area

includes all areas within the outside walls except pipe shafts, vertical

ducts, elevator shafts, balconies and stairwells; the net rentable area is

the gross rentable area less public corridors, bathrooms, janitorial,

storage or electrical closets and any other area not available to the

tenants; the usable area is the area on any floor that can be actually

used by the tenant.

Industrial property includes all land and buildings involved in the

production, storage and distribution of goods and products. Most

industrial properties have little need for continuing, on-site

management. More often brokers will play a useful role in helping

manufacturers find properties for new plants or distribution facilities

and in negotiating leases.

Residential Property Management

Real estate property management attempts to balance the needs of a

property owner with those of a tenant. A property owner desires to rent

or lease space at a rate which will produce a return sufficient to pay

operating expenses and fixed expenses (e.g., property taxes, property

insurance and mortgage indebtedness), and provide a return on the

owner’s equity. The tenant wishes to rent or lease space at a rental

rate that is affordable or that will allow him to utilize the space at a

profit. Competent, experienced professional property managers are

able to satisfy the requirements of landlords as well as tenants, and

create net savings, rather than an expense, for the owner.

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While some property owners will administer the leasing, rent

collection, and maintenance functions directly or through salaried

employees, most owners of investment property contract for property

management with a specialized professional management agent with

knowledge of how to plan for new developments and maintain

existing ones, and how to deal with the complex legal, social and

economic relationships between landlords and tenants. Also, the size

and complexities of office and apartment complexes and retail centers

require intensive servicing, with large numbers of workers and

technicians, and proper amounts of materials and equipment on hand

or readily available.

An effective property manager will help the owner generate the

greatest possible net income over the period of time the owner expects

to own the property, whether such income is in the form of net rental

income, capital gains upon resale of the property, or tax savings.

Properties requiring specialized management skills include office

buildings, retail buildings, shopping centers, apartment houses,

condominium projects, single-family homes, lofts, factories, garages,

hotels, public buildings, industrial parks, mobile home parks, mini-

warehouses, parking lots, and marinas and their installations.

Residential Property – Landlord Tenant Code

A property manager managing residential properties is subject to the

Residential Landlord-Tenant Code (HRS Chapter 521), governing the

legal rights and responsibilities of landlords and tenants in residential

real estate. While neither the Real Estate Commission nor any other

state agency administers this law, a tenant whose rights have been

violated, does have easy access to legal recourse in court.

The law describes the rights, responsibilities, duties and legal remedies

of both the property owner and the tenant and sets minimum

requirements for residential tenancy agreements. A property manager

must be familiar with the provisions of this law and know how they

apply to the management of residential dwelling units for his clients.

Failure to fully comply with the law and to use the required procedures

for serving notices and for evicting tenants may subject the landlord to

forfeiture of various rights as well as damages.

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This law does not apply to industrial and commercial real estate rental

agreements (e.g., mini-warehouse, office and industrial site leasing).

This law does apply to cooperative apartments and residential

condominium units. While condominium and cooperative units may

be offered for rent by the owner subject to rules and bylaws adopted

by the trustees or board of directors of a cooperative, or by the

directors of a condominium owner’s association, they are generally

occupied by their owners.

In both types of ownership, the occupant of the apartment remains

responsible for maintenance and repair of the interior of the residential

unit, while the exterior and all common areas and facilities are the

responsibility of the owners as a whole. The cost of all common

maintenance activities and taxes is funded by pro rata assessment of

the occupants. Management and maintenance of the property is

essentially the same as for an apartment offered for lease, except for

advertising and negotiating for tenants.

The owners may elect to perform the necessary planning, budgeting,

hiring, supervision and accounting functions through their

organization. But, most larger complexes have found that

maintenance is more efficiently performed and relationships with

occupants are more harmonious when management is provided by a

professional property manager. Therefore, many licensed property

management firms offer management contract services to cooperative

and condominium owners.

Because condominium and cooperative owner-residents are assessed

monthly to pay their proportionate part of the annual expense

budget, they will react strongly to any mid-year surprise increases.

Therefore, the property manager must develop accurate operating

plans and budgets for the property owners and have them carefully

examined and approved by the owners’ governing body. The plans

and budgets must provide for normally anticipated expenses, as well

as for unforeseen emergencies. Plans should be projected for several

years in anticipating major repair projects, such as new roofs, exterior

painting, and driveway repairs or replacement. The manager’s

operating budget will pertain only to those items for which the

condominium or cooperative association is responsible, e.g., insurance,

grounds, building exterior, reserves for replacing the roof and

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mechanical systems, etc. The budget would not include expenses

pertaining to the interior of the owners’ units, e.g., painting,

replacement of refrigerators and stoves, etc. Also, because the

expenses would be paid from assessments against all the units in the

complex, there is no need to include a vacancy allowance in the

budget.

Many new condominium projects will have a large number of units

leased rather than owner-occupied when sales are moving slowly and

the developer offers units for rent in order to generate revenue to offset

development costs and debt service, or when investors purchase or

option units in the pre-construction stage or in the initial sales stage

when prices are comparatively low. A large number of rental units can

create special problems for the condominium owner’s association and

the property manager.

Tenants may not care for their units in the same manner as owner-

occupants would. They may demand special management services

and interior-unit maintenance normally expected from an apartment

manager. And when units are offered for rent by the owners or various

real estate brokers, the advertising and showing of the units may

irritate the residents and create breaches of the building’s security.

Many of these problems can be minimized if all rental units are

handled by one broker who is also the manager or who will cooperate

with the manager.

HAR Standard Rental Agreement

Note: This section relates to the Hawaii Association of Realtors® Rental

Agreement (RR301), Property Condition Form (RR302), Suggested

Checklist for Vacating Tenants (RR304) and Security Deposit Statement

(RR403), which are reprinted at the end of the chapter. Download these

forms for reference to accompany the discussion below.

Under HRS Chapter 521, Hawaii Residential Landlord-Tenant Code (the

Code) residential rental agreements between landlords and tenants

could be written or oral. A written agreement may be for any length of

time – month-to-month, six months, one year or any other term. When

the agreement is written, all promises and house rules should be

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included in the agreement, and any new agreements or changes to

the existing agreement should be put into writing and signed by both

parties. Furthermore, when a rental agreement is in writing, the

landlord must furnish a copy to the tenant.

An oral agreement, though not recommended, will normally create a

month-to-month tenancy or a tenancy for a fixed term of no more

than one year in duration. A lease for more than one year must be in

writing to be enforceable. Whether written or oral, all details of the

agreement should be clearly spelled out.

The Hawaii Association of Realtors® has developed a residential rental

agreement that may be used by Realtors® or any other persons who

wish to purchase it. Its use is not required by the Real Estate

Commission. However, because it has been carefully crafted and

reviewed, it does comply with all applicable laws and serves to

reasonably protect the interests of the landlord and the tenant.

A rental agreement needs to detail all terms of the agreement. This

includes the following:

• The exact property being rented and to whom the property will be

rented

• When the tenancy begins and ends, or if not for a fixed term,

what is necessary to cause it to end

• The amount of rent; how, where, by when and to whom the rent is

to be paid; and the penalty for late rent or returned checks

• The amount of any fees and/or deposits to be held by the

landlord

• Any services for which the tenant must pay, in addition to the rent

• Any special provisions for individual tenants

• Any exchange of services that will affect the amount of rent, such

as yard work for reduced rent

These and other items unique to the agreement with the particular

tenant are inserted in the blanks provided on the first two pages of this

agreement.

However, the four-page agreement includes a number of terms and

provisions that spell out rights, duties and remedies of the parties.

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Term Of Tenancy

A key section of the form deals with the term of the tenancy. The two

most common tenancies are fixed term (or estate for years) and

month-to-month (or periodic tenancy). However, others are possible,

including week-to-week tenancies, so the form provides room for

specifying other lease periods.

With a fixed term rental, rent cannot be increased before the end of

the rental period. Furthermore, the landlord has no right to terminate

the agreement during the rental period unless the tenant fails to pay

rent or fails to comply with the terms of the rental agreement. For a

fixed term rental, a termination date must be stated in the agreement,

and on that date, termination would be automatic without any

requirement that the landlord provide any advance notice.

However, if the landlord and the tenant do not communicate with

each other, to inform the other of their intentions, problems would

likely arise. A landlord who expects the tenant to renew the lease and

stay, would not take any action to rent out the unit, and is sorely

disappointed when he discovers that the tenant has moved out at the

end of the lease term. A landlord who expects the tenant to be

moving, would lease the unit to another tenant, and be in an

uncomfortable situation when he finds that the tenant has stayed.

A tenant who remains in a unit after the termination date without the

landlord’s consent, would become a holdover tenant, and have a

tenancy at sufferance. Under the provisions of the Code, a holdover

tenant would be liable for a sum of up to twice the monthly rent under

the expired agreement, calculated on a daily basis for each day he

remains in the unit and could be evicted any time during the first 60

days of the holdover tenancy.

Standard Term C (5) establishes that the tenant will be treated as a

holdover tenant if he fails to return the keys to the unit, complete all

repairs, remove his personal items and clean the unit. If the landlord

does not sue or enter into a new rental agreement with a holdover

tenant during the first 60 days of the holdover, the tenant will be

treated as a month-to-month tenant and pay the monthly rent

specified in this rental agreement.

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To avoid these problems, the parties can agree, at the time of entering

the rental agreement, to a rental extension. This converts the fixed

rental agreement to a month-to-month tenancy, at the same terms

and rental amount, unless the landlord gives the tenant a written

termination notice 30 days prior to the end of the lease term.

Standard Term H protects military tenants by allowing such a tenant

to terminate a lease with 30 days advance written notice from the

date of the next rent payment is due and a copy of military orders

requiring a change of residence to a place off the island for 90 days or

more.

Security Deposit

Section 5 of the form deals with the amount of the security deposit.

The Code limits the amount of all deposits to no more than one

month’s rent. This includes the security deposit and any deposits for

keys, pets, or anything else. Therefore, the most the tenant can be

required to pay is the security deposit and the first month’s rent.

The security deposit may not be used by the tenant as last month’s

rent. Therefore, the tenant cannot refuse to pay rent the last month of

his lease and demand that the landlord use the deposit as the rent.

Only the landlord, not the tenant, can decide whether he will apply

the security deposit to cover unpaid rent. The tenant may not use the

deposit as payment for the last month’s rent unless the landlord

agrees with the tenant in writing to such a use, and the tenant gives 45

days notice prior to vacating the premises. In any event, the landlord

retains the right to have the tenant pay for damages caused by the

tenant.

If any interest is earned on the deposit, it may be paid to whoever is

cited in the agreement. The Code does not require that the tenant be

paid interest on the deposit.

As specified in the Code, a security deposit is money given by the

tenant to the landlord for the following purposes:

• Remedy tenant defaults for:

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o accidental or intentional damages resulting from failure to

maintain the dwelling unit and all facilities, appliances,

furniture, and furnishings supplied by the landlord in fit

condition, reasonable wear and tear (deterioration or

depreciation in value by ordinary and reasonable use)

excepted;

o failure to pay rent due; or

o failure to return all keys furnished by the landlord at the

termination of the rental agreement.

• Clean the dwelling unit or have it cleaned at the termination of

the rental agreement so as to place the dwelling unit in the same

condition as it was in when the tenant entered into possession.

• Compensate for damages caused by the tenant, if he wrongfully

quits the dwelling unit.

In order to retain any portion of a security deposit, the landlord must

give written notice of the reasons to the tenant. All costs, such as

cleaning or specific repairs, must be itemized and copies of receipts

included. If the repairs cannot be accomplished within 14 days,

estimates for the cleaning or repair services may be substituted.

The Hawaii Association of Realtors® has developed a Security Deposit

Statement for use by landlords to comply with these requirements.

The form shows all deposits held by the landlord, and all charges the

landlord is claiming, itemized for such items as cleaning, pest control

services, repairs and replacements, unpaid rent, uncollected late

charges and uncollected interest, with a balance claimed by the

landlord or due the tenant.

This or a similar notice, along with any portion of the security deposit

remaining, after deductions, must be given to the tenant within 14

days after the termination of the rental agreement. In order to comply

with this 14-day requirement, the landlord may mail the material to

the tenant on or before the fourteenth day. The landlord should

obtain acceptable proof of mailing from the Post Office. He may also

prove compliance with the 14-day requirement by other types of

evidence, such as the tenant’s acknowledgment or the testimony of a

witness.

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If the landlord fails to serve notice and return any remaining security

deposit within 14 days, he must return all of the security deposit to the

tenant.

These requirements are laid out in Standard Term E (3) of the Rental

Agreement form. It provides the landlord will return the security

deposit within the 14 days after termination of the agreement, with a

written statement explaining any deductions. Deductions can be

taken for the following reasons:

• To repair or replace damaged or missing items • To pay any amounts due • change locks and replace keys and cards not returned by the

tenant • To clean and place all items and the unit in the condition they

had been in at the start of the rental period • To pay damages caused by the tenant leaving wrongfully, such

as by abandoning the unit before the end of the rental period or

without proper notice

The tenant is also liable for any damages and costs in excess of the

deposit amount.

In order to limit disputes over the landlord’s right to claim any part of

the security deposit, the Code requires that the landlord provide a

written inventory describing the condition of the premises and any

furnishings and appliances, prior to occupancy, and give a copy to the

tenant. Such an inventory should be precise, noting the cleanliness of

each portion of the unit and all details, no matter how minor, of the

actual condition. If a landlord does not make the written inventory,

the condition at the end of the tenancy will be presumed to be the

same as at the start, unless the landlord can prove otherwise.

Standard Term D deals with this inventory requirement. It provides that

the landlord will inspect and inventory the unit prior to the tenant

move-in, and give the tenant a written inventory form which will serve

as an agreement between the parties as to the condition of the items

and the unit at the time of move-in. The Hawaii Association of

Realtors®’ Property Condition Form (RR302) can be used for this

purpose. It provides for the tenant to review and comment on the

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management’s description of the premises within seven days or accept

the condition as noted.

The same standard term requires that at the end of the tenancy the

tenant is to remove all of his personal items, pay for storage or

disposal of any items left behind, have the unit in clean and proper

condition on the day the tenancy ends with all the same items in the

unit that had been there when he moved in, and in the same

condition, except for normal wear and tear, as they were in when he

moved in.

Neither the rental agreement nor the Code requires a final inspection.

However, an inspection is the best way to prevent disputes. The Hawaii

Association of Realtors® has developed a Suggested Checklist for

Vacating Tenants (RR304), to be used by landlords upon receipt of a

notice from the tenant that he does intend to vacate.

This form is used to confirm the tenant’s intent to vacate his unit, and

to clarify the tenant’s duties when he does vacate. Generally, for a

tenant to obtain a full refund of the deposit he would need to repair

all damages he caused to the unit during the tenancy, including holes

put into walls for hanging pictures, thoroughly clean the unit, and

return all keys on the termination date. As stated on this form, the

tenant’s duties include the following:

• Cooperate when the landlord shows the unit to prospective

tenants

• Pay the rent due

• Complete all cleaning and repairs before the move out inspection

• Return all keys and cards

• Terminate utility services

• Notify the postal service of the change of address

It also advises that the tenant can be present during the final

inspection and contains suggestions for cleaning the unit that the

tenant can use to assure he receives as great a deposit refund as

possible.

After an inspection of the premises, the landlord is not required to give

the tenant a second chance to correct conditions found unsatisfactory,

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as the rental agreement requires that the unit be in the proper

condition on the day the tenancy ends. Therefore, the tenant should

have everything in order prior to the inspection. In practice, many

landlords will give tenants a second chance, if it will enable the work to

be completed sooner than if the landlord had the conditions corrected.

Also, if an inspection were made prior to the termination date, a

tenant would have an opportunity to make any corrections required

by that date.

In addition to these terms, the agreement provides for certain landlord

and tenant rights and remedies.

Landlord Rights

A contract for money or property, such as a lease, would be assignable

unless there is a specific provision restricting assignment. This

agreement does have a restriction that allows the landlord to prohibit

any change in tenants. A certain section of the agreement prohibits

adding any tenants (so two screened tenants do not become six

unscreened tenants), subleasing (transferring some, but not all, of the

tenant rights to others), or assigning (transferring all rights to others)

without the landlord’s consent.

Standard Term C (4) of the Rental Agreement gives the landlord the

right to consider the unit abandoned if the tenant is absent for more

than 20 days without written notice and has not paid rent for that

period. If upon moving out, the tenant leaves personal property

behind that the landlord determines has no value, the landlord may

throw it away. If the landlord determines the property has value, he

must first store it, at the tenant’s expense, and then sell it in a

commercially responsible manner or donate it to a charitable

organization, after mailing notice to the tenant at his forwarding or

last known address. The landlord must hold the property for 15 days

before advertising it for sale or donating it to a charity. If he sells it, he

must hold the proceeds, less any accrued rent and costs of storage

and sale, in trust for 30 days. After that he may claim the proceeds as

forfeited.

Standard Term E (2) gives the landlord the right to enter the unit, with

at least a two-day notice, in order to inspect it, make repairs, decorate,

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supply agreed services, or show the property to a prospective buyer,

lender or purchaser. Entry must be at reasonable hours, and the

landlord cannot abuse his right or use it to harass the tenant. The

tenant cannot unreasonably withhold his consent to entry.

Standard Term E (5) provides the landlord with the right to serve

notices on any occupant of the unit. Notice served on one tenant is

notice to all tenants. If notice cannot be delivered to the tenant, it can

be posted on the unit.

Standard term F gives the landlord the right to provide the tenant’s

rental history to other landlords.

Landlord Responsibilities

One of the landlord’s responsibilities is to comply with the state

statute prohibiting discrimination in housing. This agreement notifies

the tenant that the landlord will not discriminate due to race, sex

(including gender identity or expression), sexual orientation, color,

religion, marital status, familial status, ancestry, disability, age or

human immunodeficiency virus infection.

The Code requires that the landlord issue receipts for all rents paid.

Although the Code allows that canceled checks may constitute

receipts, the tenant may request a landlord’s written receipt in

addition to the canceled checks. This agreement covers the

requirement by specifying that the landlord will provide receipts for

rent paid in cash, and if requested, for rent paid by check.

In Standard Term E(1) the landlord agrees to have the unit ready and

available for the tenant on the date of occupancy and maintain all

services he supplied to the tenant. However, he has no liability for

service or appliance interruption beyond his control, and the tenant

cannot use a service interruption as a basis for termination of the

agreement.

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Tenant Rights

A very key element of this Rental Agreement is Standard Term I(4),

which advises the parties to check the Code to learn of their complete

rights, duties and remedies. This rental agreement does not detail all

of the tenant’s rights or landlord’s obligations. Even though they are

not specified, certain rights established by law may not be waived or

modified by either party, even if the parties wish to do so.

Tenant Responsibilities

The agreement makes each tenant who signs the form jointly and

severally liable for the payment of the rent and for all other tenants

and guests acting in compliance with the terms of the agreement.

Therefore, if there are three persons sharing an apartment, each one is

responsible for all of the rent, not only one-third of the rent, if the

other co-tenants move out.

Standard Terms B and C spell out tenant duties and landlord remedies

if the tenant breaches the agreement. The tenant must:

• comply with all rules.

• not disturb others

• not alter or even put holes in the unit without written consent of

the landlord. He can make modifications to accommodate a

disability, after obtaining the landlord’s consent, but will need to

return the unit to its original condition upon termination of the

rental agreement.

• bear full responsibility for loss or damage to his belongings, so he

should maintain insurance covering his belongings.

• maintain and properly operate all appliances and fixtures.

• provide advance notice of any absence of five or more days.

• provide notice of defects the tenant is not responsible for fixing.

• not have pets occupy or visit unless he has prior written approval

(approval is granted for assistance animals).

• use the premises for legal residential use only.

The landlord may terminate the agreement immediately if the tenant

uses the unit illegally or causes or threatens to cause injury to any

person. He may terminate it after giving notice, if the tenant fails to

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either pay rent or comply with any of the terms of the agreement. The

notice for unpaid rent must allow no fewer than five business days to

pay, and the notice or violation of the agreement must allow no fewer

than ten business days to correct a violation of rules or repair damage.

Disclosures are provided in a section of the form in Standard Terms

section I:

1. Lead Based Pain Disclosure: If the unit was constructed before

1978, a Lead Based Paint Disclosure must be provided to the

tenant.

2. Asbestos Disclosure: This section warns of the possible presence of

asbestos in older units.

3. Mold Disclosure: Tenants are made aware that mold may be

present in the unit.

4. Hawaii Residential Landlord Tenant Code: Both the landlord and

the tenant should be aware of the provisions of the Code which

can be found in Chapter 521 of the Hawaii Revised Statutes.

5. Conflict with the Landlord Tenant Code and Other Laws: If the

agreement is in conflict with the Code or other laws, then the

Code and other laws prevail over the agreement.

6. Sex Offender Registration (“Megan’s Law”): Neither the Landlord,

Owner, Agent, or Brokerage Firm is required to obtain information

regarding sex offenders.

Sections 10 and 11 of the form provides checkboxes for items such as

the Lead Based Paint Disclosure, and addenda that have been

provided to the tenant.

Commercial Property Management

There is also a large management market for commercial properties,

i.e., retail buildings, office buildings and complexes, and industrial

properties. Each category of commercial property comes with its own

management problems and challenges, requiring that the property

manager be an effective business analyst, planner, organizer and

administrator.

Retail Properties

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In a retail facility, goods are sold in small quantities directly to the user

or consumer. Most typically, suburban retail developments provide for

a mix of large department stores offering a wide variety of goods and

smaller, specialty stores offering a narrow range of goods, in an

attractive, weather-protected complex, with ample parking.

The major management opportunities lie in shopping centers, where

major tenants remain for long periods of time and smaller, specialty

shop tenants may move in and out as moved by the economic tides

and their business success or failure. The manager of a shopping

center is responsible for maintaining a continuing professional

marketing program to attract tenants and maximize revenues, and for

directing an efficient maintenance service for the extensive common

areas and parking facilities.

Classifications

Shopping and retail centers are normally classified by several factors,

including size, layout, type of stores and trade area. Below are several

of the more common classifications:

• A strip center is normally small in size, consisting of just a few

stores laid out in a straight line or an L or U shape. The typical

anchor for a strip center is a convenience store. The trade area is

generally the immediate neighborhood. The center is normally

designed to provide quick and accessible shopping for limited

products, with a focus on location and community convenience.

• A specialty center is usually small in size – up to about 100,000

square feet. It usually lacks an anchor tenant and contains very

unique or specialty boutiques. It may also contain one or more

restaurants and may be located near high-income or major

tourist attraction centers.

• A neighborhood center is typically somewhere between about

25,000 to 125,000 square feet. It generally contains 15 to 20 stores

with one anchor tenant, such as a supermarket or a discount

store. It is supported by about 1,000 families in a trade area of up

to two miles from the center. Such small, neighborhood retail

buildings seldom require continuing professional property

management, although brokers are often hired to secure a tenant

or a buyer.

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• A community center may have from approximately 125,000 to

300,000 square feet of space. It will normally contain 20 to 70

stores and two or more anchor tenants, such as smaller

department stores, home improvement stores or variety stores. It

is supported by about 5,000 families within a trade area

extending out to around three miles.

• A regional center increases in size to 1,000,000 or more square feet

of space. In most cases, it will contain several large anchor stores

and an assortment of other businesses, such as apparel, jewelry

stores, and often a food court. It will have several

major department stores, restaurants and banks among its 70 to

225 stores. Depending on its size, it may require 50,000 to 150,000

families for support, within a trade area extending 10-15 miles.

Leases

Lease terms for retail property may be gross, net or percentage:

• A gross lease provides for payment of a fixed rate, with the

landlord paying taxes, insurance and other operational expenses.

Responsible for repairs is either the landlord or the tenant, based

on the terms of the rental agreement.

• A net lease provides for payment of a fixed rate, generally with

scheduled annual increases, and with the tenant paying taxes,

insurance, and maintenance. Besides “net” items, there may be

additional charges for maintenance of common areas. Common

areas are parts of the property shared by the tenants, such as

parking facilities, walkways, landscaping, administration, and

security. The charges for maintenance of these areas are known

as common area maintenance (CAM) charges. CAM charges are

prorated based on how many square feet of the total the tenant

occupies. With such a lease, the owner and manager are able to

avoid much of the burden of management but do need to

conduct regular inspections to ensure that the tenant is

performing the required maintenance, and not deferring it to

increase his profit. The net lease may permit the tenant to

sublease part or all of the property for additional profit.

• A percentage lease is the most common type of lease used in

retail centers. This lease provides for the rent to be a percentage

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of the tenant’s gross sales. The percentage rent clause will state

which sales items are part of the gross sales calculation. Excluded

sales items can include sales tax, refunds, and returns. The lease

provisions will also direct the tenant on how and when to submit

gross sales figures for percentage rent calculation. The lease will

often provide the landlord with the right to examine the tenant’s

financial records to verify reports of income, the right to

determine days and hours of operation, and the right to

terminate the lease if revenues fall below a target figure. It may

also allow the tenant to terminate the lease if gross sales

objectives are not met.

There are three common types of percentage leases:

• In a percent-only lease, the rent amount is directly tied to sales,

without any base or minimum rent. The drawback for the landlord

to this form of lease is the impact when the business does poorly. • A variable scale lease also does not contain a base rent. However,

the actual percentage of sales to be paid as rent may increase or

decrease based on various conditions. This type of lease is often

found in rehab phases of turnaround properties or in

distressed/problem properties. • With the minimum percentage lease, a negotiated minimum rent

level is established. Overage rent, a percentage of sales over a

base amount, provides the owner with additional cash flow and

serves as a hedge against inflation. The percentage clause for

overage rent generally contains a ceiling or maximum rent. A

retail lease generally will have a minimum rent (a breakpoint),

established on a per square foot basis, a percentage of gross

sales charge, and an allocation of “pass through” items. The lease

provides for payments of rent to be the greater of the minimum or

the percentage rent calculation. This type of lease is typically

found with larger, anchor tenants with bargaining leverage.

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Marketing - The marketing of retail space is challenging. Critical

components of successful marketing of retail spaces include the

following:

• Tenant mix. Tenant mix in retail centers needs to be balanced. A

good tenant mix consists of a variety of stores that work well

together to enhance the performance of the overall center and

each individual store. This helps to create the three most

important aspects of concern to property and retail storeowners –

traffic, traffic and more traffic. When determining the mix, the

property manager should look at the location, competition and

the customer base. For example, in a large regional mall

anchored by department stores, complementary tenants would

include apparel, jewelry, shoes, and so forth.

• Tenant selection. This is normally more critical than when

selecting residential tenants because leases tend to be longer

and the amount of rental money is much larger. A mistake here

can be very expensive. In addition, boarded up stores that have

gone out of business damage the center’s goodwill and image.

Some of the more important considerations for tenant selection

include the following:

o Major versus smaller tenants

o High status tenants

o Space planning

o Retention of existing tenants

o Competition

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Office Buildings

Tenant mix and selection are also critical to the success of office

buildings. Tenant selection includes many of the concerns that apply

to retail properties. The success or the failure of the building is based

on solid tenant selection. Attracting the right tenants is part of the

marketing challenge of commercial property. A successful reputation

is the best marketing tool.

An office building is generally defined as a property that provides

space to tenants engaged in providing services rather than goods

(retail space) or manufacturing (industrial buildings). In urban areas,

multi-story office buildings challenge the management skills of the

most expert property managers. In suburban settings, development of

office space has typically been in the nature of office park complexes

and two and three-story small office buildings dispersed in

neighborhood commercial centers and along major arterial streets

and highways. These smaller properties offer opportunities for

property managers familiar with local conditions.

Ranking

Office buildings are generally ranked in categories of desirability. The

main categories are:

To achieve these ratings or grades, a combination of the following 12

ranking criteria is used:

1. Location

2. Neighborhood

3. Access to transportation

4. Prestige of building

5. Appearance

6. Lobby

7. Elevators

8. Corridors

9. Office interiors

10. Management

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11. Tenant mix

12. Tenant services

These factors help place the property into the correct category. For

example, location is based more on prestige than geographic area,

while tenant mix includes the reputation of the tenants and the

compatibility of their services. Each of these factors relates to the

desirability of a specific building. It explains why an office building

with high rents is full, while the building down the street with bargain

basement rents is half empty. The higher the grade, the more

prestigious the property, thus creating higher demand and, of course,

higher rent levels.

Office leases normally run for longer than one year and include an

escalation clause in the rental rate to permit future increases that

reflect the landlord’s increases in taxes or other expenses.

Measurements

Office space is normally leased at an annual rate per square foot of

usable space or rentable area. Therefore, it is important for the

landlord and tenant to have a clear understanding of the following

terms used in building measurement:

• The gross area of the entire building is the total sum of all of the

area within the outside faces of the exterior walls.

• The gross rentable area includes all areas within the outside walls

except pipe shafts, vertical ducts, elevator shafts, balconies and

stairwells.

• The net rentable area is the gross rentable area less public

corridors, bathrooms, janitorial, storage or electrical closets and

any other area not available to the tenants.

• The usable area is the area on any floor that can be actually used

by the tenant.

To summarize:

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Gross area of the entire building

- shafts, ducts, balconies, stairs, etc.

= rentable area

- public corridors, restrooms, mechanical rooms, etc.

= usable area

The most common approach to measuring usable space on a single-

tenancy floor is to measure to the inside finish of the permanent outer

walls of the building, then deduct for stairs, elevator shafts, flues,

pipes, ducts and other utilities and support areas (but not for

structures that support the building).

For a multiple-tenancy floor, the total net rentable area for the floor is

calculated by measuring the space in each office from the inside finish

of the outer walls, corridors and permanent partitions between

adjoining office space and adding the individual rentable office areas.

Common areas, such as washrooms, lobbies and hallways are

allocated to each office pro rata according to its rentable floor space.

In setting the rent level, the property manager will take into

consideration the 12 ranking points, general economic conditions and

the owner’s desired profit margin. To do this, most managers will use a

break-even analysis to determine the minimum rent needed.

Break-even analysis takes into consideration the costs of maintaining

and operating the building, as well as the owner’s expected return on

investment. The break-even rent is calculated as follows:

Expenses + debt + return

÷ Rentable area of building in square feet

= Rent per square foot

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Income for office buildings is often classified as:

• rental income.

• service income.

• miscellaneous income.

Expenses are classified as:

• operational expenses.

• alterations, painting and decorating.

• fixed charges (e.g., insurance, taxes, and depreciation).

• financial expenses (e.g., corporate fees, organization expense,

and interest on debt).

A management plan for an office building is generally more

comprehensive and sophisticated than for an apartment building. The

market analysis for an office building may need to consider the entire

region, city or town, as well as the neighborhood in which the property

is situated, and include a detailed breakdown of the characteristics of

competitive office buildings. A property analysis of the subject

building should include its physical characteristics, financial situation,

and present operating policies, procedures, and personnel. The

manager can develop a management plan and a financial projection

only after study of all relevant facts developed by research.

Industrial Property

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Industrial property includes all land and buildings involved in the

production, storage and distribution of goods and products. It may be

single tenant, multi-tenant or general industrial parks. While many

large manufacturing or distributing firms prefer to build and own their

manufacturing, processing or storage facilities, others elect to enter

into long-term leases for property in order to avoid tying up their

capital in real estate. Industrial buildings may be suitable for general-

purpose use, or for a limited number of special purposes, or even for a

single purpose. The more limited-use buildings may be constructed by

the user, then sold to an investor and leased back for a long period,

extending at times through the anticipated useful life of the structure.

Most industrial properties have little need for continuing, on-site

management. More often brokers will play a useful role in helping

manufacturers find properties for new plants or distribution facilities

and in negotiating leases. Modern warehouse complexes with business

offices included provide flexible shipping and distributing facilities

available on relatively short-term leases and are appropriate for

professional management. Industrial property managers tend to

specialize in certain aspects of the sales, leasing and management of

industrial properties, and offer a valuable service in lease-up of new

industrial complexes, where advertising and tenant qualification are

particularly critical functions.

Over time the trend has moved toward industrial sites becoming more

oriented towards the storage and distribution of goods and locating

close to the labor source. While a gross lease may be found on occa-

sion with older properties, the typical lease for industrial park property

is a triple net lease. Therefore, once the industrial park is leased up, it is

easy to manage, resulting in fees lower than for other types of

property.

Research & Development Buildings

These are an offshoot of the industrial building and are rapidly

growing in popularity. These buildings tend to be located near major

education institutions and often employ highly skilled and educated

individuals. These buildings usually contain high tech environmental

controls along with advanced safety and security systems.

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Rental rates for these structures are typically higher than for industrial

structures, but slightly lower than for offices. Management fees are

normally based on a fixed amount per square foot or in some cases on

a percentage of the effective gross rents.

Mini-Storage Facilities

These facilities are a rapidly growing phenomenon nationwide. As the

size of homes and apartments has decreased, these properties are

filling an important void. They typically consist of long, narrow

buildings facing each other across driveways. The typical tenant mix

for mini-storage complexes is 70% residential and 30% commercial. The

property manager’s main responsibility is marketing, followed closely

by security and safety of the stored belongings.