Expert: Jim Avancena, CPM - 2/14/2011

Question
What is the average management fee charged on commercial real estate (1.2acre,7000 sqft building and 5 tenants) in Fairfax, VA

Answer
Michael:

The management fee that is charged for managing a commercial property is primarily related to the kind of commercial real estate, and the number and kind of management services that the managing agent renders the property owner.  There are also, additional considerations.

Some of the basic provisions usually found in a management contract will include each of the management services provided, how often a specific service will be provided, the process the agent will follow providing the service, the term that the management contract will be effective, and how the managing agent will be compensated.   There are many more matters addressed in writing in the contract.

For a few examples of management services, determine if the property management contractor is going to:
1.  Collect the rent due from the tenants.
2.  Provide the bookkeeping services necessary to record income and expense,
3.  Hire the contractors that are necessary to provide specific services for the property like
   trash removal, security guards or monitoring, maintain the landscaping services to maintain
   the grounds of the property,
4.  Approve and process the invoices and monthly contract fees that should be paid periodically,
5.  Hire and manage employees that will work at the property,
6.  Organize and maintain the significant records and paperwork that must be kept on file for
   the property,
7.  Direct the legal activities that may be required to operate the property and collect the
   rent,
8.  Assure that tenants lease provisions are administered as they are described in each lease,
   including preparing the periodic bills sent to certain tenants for the landlord to be
   reimbursed for Common Area Maintenance expenses, operating costs, real estate taxes, utility
   consumption, penalties, damages to the property, etc.
9.  Prepare the Federal Tax Returns for the property,
10. Administer the construction projects at the property,
11. Manage the on-going marketing and leasing program for the property to assure vacancies are  
   as low as possible.
12. Provide periodic written reports and financial statements to the owner to assure that it is
   aware of the status, considerations, and financial position of the property.

  And many other potential additional services.    

Additionally, it is also common for a property management firm to charge a fee that is not representative of the "average" fee because:

1. It manages multiple properties for the same property owner,
2. Because of economies (or non-economies) of scale,
3. The firm is known to provide truly higher quality services than other firms,
4. The firm is new and is giving a discount for their services in order to get business,
5. The management firm is formally "accredited" by certain professional organizations as having
  the formal educational and experiential knowledge only the best quality firms provide.
6. Etc., there are many other reasons.....   

You should compare other management contracts for similar property (1.2 acres, 7,000 s.f., 5 tenants. Are they Retail, Office, or Warehouse tenants?) in your area, note the services provided, how much the agent is paid, etc. and you will get a balanced understanding of what is a "market" management fee for the services.  This requires that you ask other property owners to show you their management contract - probably a difficult task - or ask individual property managers to show you the contract terms in effect for the properties they manage.

You can also contact the closest chapter of the Institute for Real Estate Management (IREM) and discuss your question with the property management professionals of that chapter. (Contact IREM in their main office in Chicago and get the contact information for your local management chapter).

Unfortunately there are also many property management contractors that charge a fee based on what they believe is the "average" or accepted industry management fee and offer what they consider are the same services as other firms.  However many contractors have little understanding of the many critical tasks performed by professional property managers.   These firms focus more on the form of the property management contract and are overpaid because they do not/cannot perform the quality services the professionals provide.

I hope my answer has given you a basic understanding of how complicated determining the appropriate management fee can be.

Good luck.

- Jim