Reviewing the Management Fee

 

What is the management fee?

 

Virtually every lease contains a stipulation within the operating expense clause stating that the landlord can charge the tenant an amount related to the management fee for the building. Read the clause carefully, because it may have several implications. Usually, the fee is stated as a percentage—but a percentage of what? In most cases, it's a percentage of the gross revenues of the building during that billing year. Make sure that in negotiating your lease, you check that the percentage noted in the lease is the same as the contract amount between the management company and the landlord. Landlords have been known to put a surcharge on top of that.

 

Grossing up that fee can impact expenses.

 

As in the other expenses (such as electricity), you can't simply take Ms. Jones' (remember she's your 6th grade teacher mentioned previously) formula and apply it to management fees. Since management fees are based on actual revenue, you have to come up with a formula that will allow you to plug in a realistic number for the potential gross revenues for the building should it be 95% leased. This is a black hole landlords love to exploit.

 

How does one establish that figure? The straight forward method would be to take the rental rate in the building during that time period (R), multiply that by the available square footage available (SF), and multiply that result by the management fee percentage (X%). Where does RxSFxX% get you? If it's the landlord doing the calculations, the R factor is probably based on the lowest starting rate in the building during that year. That's where red flags should start to fly.

 

Shouldn't the gross up rental rate be based on a fair market value? Or, at the least, based on an effective rate? Yes, it should. A broker can ensure it is.