Expert: Jim Avancena, CPM - 2/22/2008

Question
Currently I own two retail centers that I self-manage.  I am in the process of starting a residential and commercial property management firm.  Since I have not used a management company for my properties, I am not sure what the rate is in the Chicagoland area.  I have heard up to 10% or flat monthly fee ($100-$125) for residental and 3%-6% of gross income for commercial (including retail, office and industrial).
Any information you can provide, would be greatly appreciated.  Thanks.

Answer
Connie-
I do not have enough expertise to advise you regarding residential management fees, you may know more than I regarding fees in residential real estate management.  However commercial office building property management is usually within the range of two to five percent (2% to 5%) each month paid to the property management company calculated by using the total income/rental collected by the property manager for that particular month.  

Retail property management fees can be higher amounts because retail property management can, and often is, more administratively intensive.   Note however, that just because retail property management CAN be more demanding in the amount of effort required to manage each retail property in the most advantageous and professional manner, it does not mean that the property manager should get a blank check to receive a higher management fee than the services they provide will justify.   

The greater number of specific management services that are provided in a professional manner under the terms of a property management contract, the higher the percentage fee that is usually paid to the managing agent.

However, the management fee can reflect economies of scale.  Say for example, you manage one retail center of 100,000 square feet of shops for a four (4%) percent fee. If you were to add three more retail centers of the same size, all within three miles of each other, you would realize several areas of savings because of the proximity of the four (4) properties, and then choose to only ask for a three (3%) percent management fee for each property each month allowing both your property management firm and the landlord(s) to benefit from the volume and proximity savings.

Although the quantity and quality of the services provided is the objective means of determining a reasonable fee, it is common for a landlord that owns and operates his own property management company to charge a bit more percentage-wise given the same number and quality of services because he believes he has a captured clientele(the tenants), and they can usually get away with charging an excessive management fee.  The landlord is essentially agreeing to pay the property management firm (i.e.,himself) a higher fee at the tenants' expense.   This is not considered an "arms-length" transaction by reputable accountants but it is a commonly occurring practice in the industry.   Sometimes this practice is challenged by groups of tenants in court to mitigate this unfair practice.

Please let me know if I can help you further with your related questions. Perhaps you have a more specific question that you need answered that I have not responded to directly.

There are professional associations of residential management specialists that could probably provide you with an answer to the residential management fees.

Good luck.

-Jim