Property Management Lesson 3 PDF

3 Working with Management Clients Learning Objectives After completing this lesson, students should be able to… Contrast the ownership, liability, and management characteristics of the various types of business entiti...

3 Working with Management Clients Learning Objectives After completing this lesson, students should be able to… Contrast the ownership, liability, and management characteristics of the various types of business entities that may employ a property manager Explain the agency relationship between property manager and client and list the fiduciary duties involved in that relationship Distinguish between an independent contractor and an employee Explain the steps involved in developing a management proposal Describe the property manager’s responsibilities and the property owner’s obligations that are typically included in a property management agreement Discuss the manager’s obligations in establishing and maintaining a system for client records and reports Analyze what happens when a management agreement is allowed to expire naturally, and when the agreement is terminated prematurely by one of the parties Suggested Lesson Plan 1. Give students Exercise 3.1 to review the previous chapter, “The Economics of Real Es- tate Investment.” 2. Provide a brief overview of Chapter 3, “Working with Management Clients,” and review the learning objectives for the chapter. © 2021 Rockwell Publishing  Property Management Instructor Materials 3. Present lesson content: Types of Property Owners – Sole proprietorships – Corporations – General partnerships – Limited partnerships – Limited liability companies (LLCs) – Trusts – Joint ventures EXERCISE 3.2 Types of business entities The Legal Relationship Between Manager and Client – Agency relationship – Employment status – Trustees EXERCISE 3.3 Identifying agents and principals EXERCISE 3.4 Recognizing fiduciary duties Working with a New Client – Determining the client’s goals – Developing a management proposal – Management agreement – Handover procedures – Client records EXERCISE 3.5 Distinguishing between management proposals and management agreements Communicating with the Client – Reports – Keeping in touch – Consultation and decision-making Terminating a Manager-Client Relationship 4. End lesson with Chapter 3 Quiz. 2  Chapter 3: Working with Management Clients Chapter 3 Outline: Working with Management Clients I. Types of Property Owners A. Sole proprietorship: a business made up of one individual; the most common form of business entity because they are easy and inexpensive to form 1. Advantages include lower administrative and legal costs, complete control over day-to-day operations, and more privacy (less disclosure of financial information) 2. Disadvantages include limited resources to purchase property, no one to share risks and responsibilities, and unlimited liability a. Unlimited liability: when a business owner is personally liable for the busi- ness’s debts b. In contrast, some business arrangements provide limited liability: member’s personal assets are protected from business liabilities; an individual can set up the business as a corporation or LLC, but loses some of the control and privacy B. Business syndicate: any group of investors who pool their investment capital to pur- chase investment property 1. Title to the investment property is usually held in the business entity’s name, rather than in the names of individual investors 2. Syndicate investors often have limited liability 3. Syndicator/sponsor: someone who organizes an investment syndicate 4. In some cases, interests in syndicates are considered securities 5. Investors can often buy more expensive properties by pooling funds 6. Common types of syndicates include corporations, general partnerships, limited partnerships, limited liability companies (LLCs), trusts, and joint ventures C. Corporation: a form of business ownership in which individuals (shareholders) pur- chase stock in the company as an investment 1. Closely-held corporation: a small or medium-sized company with only a few shareholders 2. The corporation’s income is distributed to shareholders in the form of dividends 3. Articles of incorporation: a document filed with the appropriate state official that establishes the corporation, lists the name and address of each incorporator, ex- plains the share structure, and includes a general statement of purpose 4. A corporation is treated as an artificial person: it can enter into contracts, own property, incur debts, and sue or be sued 5. Corporate officers: those appointed by a corporation’s board of directors to run the business on a day-to-day basis 3  Property Management Instructor Materials 6. The primary advantage of the corporate business form is protection from liability for the corporation’s debts 7. Double taxation: when income from a company is taxed at the corporate level, and then taxed again at the individual shareholder level; a disadvantage of corpo- rate ownership D. General partnership: an association of two or more individuals who operate a busi- ness as co-owners for profit 1. General partnerships are created by express agreement (oral or written), and are relatively easy to set up 2. Partners all share equally in the profits, losses, and management of the business, unless otherwise agreed 3. Income is taxed only at the individual partner level, and partners have unlimited liability for the business’s debts 4. In general, property acquired for the partnership business, plus anything pur- chased with partnership funds, is partnership property a. Title to partnership property can be held in the name of the partnership or the individual partners, so long as the deed makes reference to the partnership b. If property is acquired in the partnership’s name, it can only be conveyed in the partnership’s name E. Limited partnership: similar to a general partnership, but a limited partnership has one or more general partners, plus one or more limited partners 1. General partners have the rights and duties like those in a general partnership; limited partners have limited liability and a limited role in management F. Limited liability company (LLC): a form of business entity that combines the advan- tages of a corporation with the advantages of a general partnership 1. An LLC is created by filing articles of organization with the state 2. LLC owners (members) can choose any method of allocating income and losses 3. An LLC can be member-managed or manager-managed a. Member-managed: every member has agency authority, and can bind the LLC with their actions b. Manager-managed: ordinary members do not act as agents of the LLC, only managers do 4. Members have limited liability, and income is taxed like a partnership at member level only G. Trusts: one or more trustees manage property for the benefit of one or more benefi- ciaries 1. Real estate investment trust (REIT): a real estate investment business that quali- fies for tax advantages if certain conditions are met a. An REIT must have at least 100 investors, and at least 75% of its investment as- sets must be in real estate 4  Chapter 3: Working with Management Clients b. A qualifying REIT avoids double taxation so long as at least 90% of its income is distributed to investors annually H. Joint venture: a business arrangement that is similar to a partnership, but is created only for a single project or limited series of business transactions, rather than an on- going business EXERCISE 3.2 Types of business entities II. The Legal Relationship Between Manager and Client A. An agency relationship arises when one person authorizes another to represent him in dealings with third parties 1. The parties in an agency relationship are the agent, the party who’s authorized to represent another; and the principal, the party who authorizes and controls the action of the agent a. Persons outside the agency relationship who deal with the principal through the agent are third parties; a subagent is an agent of an agent 2. Agency law applies to property managers representing their clients; for third par- ties, dealing with the agent is the equivalent of dealing with the principal a. Agency law varies from state to state, and some states have passed laws that supersede general agency law b. In states where property managers are regulated by the real estate law, they may have a duty to disclose their agency status 3. A property manager’s agency authority is usually described in the management agreement a. General agent: an agent who has authority to handle all matters for the princi- pal in certain specified areas b. Special agent: an agent who has limited authority to do a specific thing or conduct a specific transaction c. Authorized actions of an agent are binding on the principal as long as those actions fall within the scope of the agent’s authority; the principal may also have vicarious liability for an agent’s unauthorized acts, depending on state law 4. Fiduciary: a person who stands in a special position of trust and confidence in relation to someone else; an agent owes fiduciary duties to the principal from the beginning of the agency relationship a. Fiduciary duties include care and skill, obedience, utmost good faith, loyalty, confidentiality, disclosure of material facts, and accounting B. The manager’s employment status also affects the manager-client relationship 1. Independent contractor: a person hired to perform a task and use his own judg- ment in completing it 2. Employee: a person hired to perform whatever tasks the employer wants, and supervised and controlled closely 5  Property Management Instructor Materials 3. Various employment and tax laws apply only to employees and not independent contractors 4. A property manager is usually an independent contractor in relation to the proper- ty owner; property managers who work as independent contractors are sometimes called “fee managers” a. Some managers are salaried employees, especially if the employer is an insti- tutional property or a financial institution C. A property manager may also work as a trustee (or employee of a trustee) 1. In a trust, the trustee is given legal title to a property, along with the responsibility for holding and managing the property on behalf of the beneficiaries 2. This arrangement is most common when a manager works for a financial institu- tion EXERCISE 3.3 Identifying agents and principals EXERCISE 3.4 Recognizing fiduciary duties III. Working with a New Client A. To manage the financial and physical aspects of the client’s property to achieve the client’s goals, the manager must first determine the client’s goals 1. Financial goals can vary from client to client and may change over time 2. Nonfinancial goals include pride of ownership, nonfinancial self-interest, and a desire to provide social benefit 3. Values, attitudes, and personality affect the client’s goals; some clients have an aversion to risk 4. With difficult clients, it’s often better to end the relationship B. After determining the client’s goals and values, the manager prepares a management proposal: an analysis of the property’s current status (physical, financial, and opera- tions) compared to competing properties, and a list of recommended changes to help the client reach her goals 1. Once signed, the management proposal becomes the management plan C. Management agreement: a contract that establishes and defines the working relation- ship between the property owner and property manager 1. Most states require the agreement to be in writing and signed by both parties 2. The management agreement should set forth all of the terms and conditions of the manager-client relationship 3. The management agreement must identify the owner and the manager, and must be signed by both parties; the agreement must also identify the property to be managed 4. The duration of the agreement depends on the type of property as well as the cli- ent’s goals; some states require a definite termination date 6  Chapter 3: Working with Management Clients 5. The manager needs express grant of authority from the owner; the agreement should also designate decision-makers for non-routine matters 6. The manager’s responsibilities should be clearly stated in the agreement, and should address financial responsibilities and general management duties a. Financial responsibilities generally include collecting income, managing ac- counts, paying expenses, sending net income to the owners, handling deficits and audits, and maintaining a fidelity bond, if required b. General management duties often include managing staff and payroll, ad- vertising, selecting tenants, entering into contracts, arranging repairs and alterations, and enforcing lease terms c. The agreement should also dictate how often the manager must provide re- ports to the owner 7. The agreement should spell out the owner’s obligations; at minimum, the owner must provide information, records, and documents needed by the manager a. The owner’s obligations may also include keeping the property insured, en- suring compliance with laws and regulations, providing funds for shortfalls, and providing funds for capital expenditures and major repairs 8. The agreement should specify how the manager’s compensation is calculated and when and how it will be paid, including fees for special services not part of the manager’s regular responsibilities D. Handover: the process by which a new manager takes over management of the prop- erty 1. The manager should obtain: owner information; contact information for accoun- tants, attorneys, and contractors and vendors; property information; the accounts payable ledger; leasing info and documents; employment records; and informa- tion on and access to bank accounts 2. The manager uses the information provided to: set up client records; set up ac- counts; establish a working capital fund; transfer security deposits; notify parties of the new management; and inspect the property E. After the handover, the manager must establish a secure system for recording and storing all relevant information about the property 1. The client’s records may be kept electronically or in paper format 2. For each property under the manager’s control, he should keep folders that contain the management contract, deed or title, and mortgage documents; the management plan and underlying research; correspondence from owners and tenants; leases and tenant information; budgets and bank accounts; insurance policies and claims information; employee information; maintenance records; and service contract information EXERCISE 3.5 Distinguishing between management proposals and management agreements 7  Property Management Instructor Materials IV. Communicating with the Client A. The management agreement should specify exactly which reports are required, and when and how they will be submitted; state licensing laws may have minimum re- porting requirements 1. The agreement usually requires the manager to submit a written financial report on a monthly basis 2. The agreement may also require quarterly and yearly financial reports, including an annual profit and loss statement and an operating budget B. The level of communication with a client depends on the type of client and type of property C. The manager should seek the owner’s input concerning non-routine decisions; in an emergency, the manager should use her best judgment to get control of the situation, then contact the owner V. Terminating a Manager-Client Relationship A. When a property management relationship terminates, the manager must hand over keys, operating funds, records, and security deposits to the owner or the new manager 1. Termination agreement: an agreement that spells out the status of all management duties and expenditures, and designates who is responsible for payment or reim- bursement of expenses B. Either party can withdraw from the management agreement and terminate the rela- tionship at any time, but if the agreement has not yet expired, the withdrawing party may be liable for breach of contract 1. Breaching party may owe the other party damages for any resulting financial losses 2. Management agreement may contain liquidated damages clause, which sets forth a predetermined amount that both parties agree will serve as full compensation for breach of contract Exercises EXERCISE 3.1 Review exercise To review Chapter 2, “The Economics of Real Estate Investment,” have students fill in the blanks in the statements with the correct term. Monetary policy Ownership Recovery Equity Yield Leverage Debt Appreciation Net operating income (NOI) 8  Chapter 3: Working with Management Clients 1. A business cycle consists of the stages of prosperity, recession, and ____________. 2. To make decisions about influencing the size of the money supply, the Federal Reserve looks to the dictates of the government’s ____________. 3. ____________ refers to the increase in value of an asset over time. 4. Simon has shares of stock in Microsoft. This is a/an ____________ not a/an ____________ investment. 5. The difference between a property’s market value and the liens against the property is the owner’s____________. 6. Billy borrows money to buy an investment property; this is called using ____________. 7. A real estate investment property’s ____________ is determined by subtracting the property’s operating expenses from the rental income. 8. The ____________ of investment refers to its rate of return. Answers: 1. RECOVERY. The real estate market also generally follows the cycle of prosperity, recession, and recovery. 2. MONETARY POLICY. The government’s monetary policy is largely implemented by the Fed. 3. APPRECIATION. An investor expects ownership investments to appreciate over time. 4. OWNERSHIP/DEBT. Stock gives an investor an ownership interest in a company (as opposed to a bond, where the investor is merely loaning the entity money). 5. EQUITY. Assuming the liens do not exceed the property’s market value, the owner has equity. 6. LEVERAGE. An investor can borrow money to buy an asset but doesn’t have to share the appreciation (if any); this is leverage. 7. NET OPERATING INCOME. The NOI is essentially the monthly or annual profit—the amount left over after expenses. 8. YIELD. Yield is a synonym for the return on an investment; with a savings account, for example, the yield is the rate of interest paid by the bank. 9  Property Management Instructor Materials EXERCISE 3.2 Types of business entities State whether each entity listed below is a corporation, sole proprietorship, partnership, limited liability company, or a real estate investment trust. 1. SailAir is a large business that manufactures yachts. Hundreds of people own the company. None of the owners are liable for SailAir’s debts, however. The company pays taxes on its income; the owners also pay taxes on the profits (dividends) that are paid to them by the business. In other words, there is double taxation. Each year, the owners vote on candidates for a board of directors who make policy decisions for SailAir. 2. Toma owns 100% of a minimart. He makes all decisions for the business, although he hires employees to staff the counter. He does not file a business tax return; he only reports the business’s income on his personal tax return. If someone gets injured at the store, he is personally liable (though he covers much of this liability with insurance). 3. Laura and Bob start a web business selling T-shirts. There is no double taxation on the T-shirt business income. Laura and Bob have shared personal liability for the debts of the business. There is no real structure to their business; the two of them discuss any problems and come to a decision. 4. A business with potential to grow quite large gets started by filing articles of or- ganization with the state. The owners of the business are called members. The members do not have personal liability for the company’s debts and do not have double taxation. 5. A real estate investing business that focuses on retirement properties in the south- west gets tax advantages, but has to meet certain IRS requirements. Chiefly, the entity must have at least 100 investors, and at least 75% of their investment assets must be in real estate. Answers: 1. CORPORATION. Most corporations pay tax on their income; they distribute profits in the form of dividends to the owners who again pay tax on this income. Owners of corporations generally do not have personal liability for the debts of the busi- ness. 2. SOLE PROPRIETORSHIP. As the term “sole” implies, a sole proprietorship has only one owner. There is no entity separate from the owner to speak of; the owner is personally liable for the business debts and pays taxes on the business income using his personal tax return. 10  Chapter 3: Working with Management Clients 3. PARTNERSHIP. Partnerships do not require any formal steps (such as filing articles of incorporation for a corporation) to create them. Two or more people who start conducting business together without organizing as a corporation, an LLC, or a limited partnership have a partnership. Ordinary partnerships are sometimes called general partnerships. 4. LIMITED LIABILITY COMPANY (LLC). The owners of an LLC are called members. Much like a corporation, the entity must file articles with the state. However, unlike many corporations, there is no double taxation. Members of an LLC, as the name implies, are not personally liable for debts of the business. 5. REAL ESTATE INVESTMENT TRUST (REIT). As with any trust, a trustee manages the REIT. The investors generally do not get involved in managing the REIT’s real estate assets, nor do they have personal liability for the REIT’s debts. In this sense, the owners of the REIT are like limited partners. EXERCISE 3.3 Identifying agents and principals Each of the following people is acting either as an agent or a principal. For each, state which role the person is assuming. For the principals, note who their agent would be; and for agents, note who their principal would be. 1. A jewelry store counter clerk and her employer. 2. A home buyer and the real estate licensee she is working with. 3. A movie star and the person who represents him in negotiations. 4. A plaintiff in a personal injury lawsuit and her attorney. Answers: 1. The clerk is an agent and her principal is the jewelry store. Employees who deal with the public are agents of their employer. 2. The home buyer is a principal; the real estate licensee who represents her is her agent. 3. The movie star is a principal and his representative is his agent. 4. The plaintiff is the principal and her lawyer is her agent. 11  Property Management Instructor Materials EXERCISE 3.4 Recognizing fiduciary duties Discussion prompt: Loyola agrees to manage Bertram’s 30-unit apartment house. Loyola has a license but has never managed any property. Bertram wants to see how things go, so they make it a one-year management agreement. Bertram is very concerned about expenses. After three months, Loyola raises the rents on seven of the apartments. She doesn’t tell Bertram about this. Instead, each month she uses the additional money to pay for maintenance and other work on the property. This way it looks like she’s very efficient at keeping costs down, which means Bertram will rehire her. Which fiduciary duties has Loyola clearly violated? Which violations has she at least arguably avoided? (Here is the list of fiduciary duties mentioned in the textbook: care and skill, obedience, utmost good faith, loyalty, confidentiality, disclosure of material facts, and accounting.) Analysis: Loyola has violated the following duties: UTMOST GOOD FAITH. The agent must act with honesty and integrity in regard to the principal. Loyola has not shown complete honesty. LOYALTY. The agent must put the principal’s interests ahead of the interests of third parties, and also ahead of the agent’s own interests. Loyola put her interest in getting rehired ahead of the owner’s interests. ACCOUNTING. The agent must account to the principal for all funds handled on the principal’s behalf. Loyola clearly misrepresented her accounting. OBEDIENCE. The agent must carry out the principal’s instructions. Loyola’s man- agement agreement probably states that the owner has to give final approval of rent raises or at least receive notification of them. DISCLOSURE OF MATERIAL FACTS. The agent must disclose to the principal any information that could influence the principal’s judgment in a transaction. Material information would include changes in monthly rent. She’s also failing to disclose facts that would influence the owner’s decision about her employment when it comes time to renew the management agreement. Loyola probably has not violated the duties of: CARE AND SKILL. The agent must use reasonable care and skill when acting on behalf of the principal. There are no facts given that show Loyola lacked particular skills necessary for the job. CONFIDENTIALITY. The agent cannot reveal the principal’s confidential informa- tion to third parties. There are no facts that show a breach of confidentiality. 12  Chapter 3: Working with Management Clients EXERCISE 3.5 Distinguishing between management proposals and man- agement agreements Which of the following items would be found in the management proposal? Which would be found in the management agreement? 1. Operating budget 2. Suggestions for a new rental schedule 3. Ways in which the property could be improved to charge higher rents 4. Manager’s compensation 5. Comparison of the property to competing properties 6. Manager’s responsibilities 7. Expiration date Answers: MANAGEMENT PROPOSAL. The management proposal describes a proposed man- ager’s qualifications and includes suggestions regarding what could be done with the property. So this document would address: 1. Operating budget; 2. Suggestions for a new rental schedule; 3. Ways in which the property could be improved to charge higher rents; and 5. Comparison of the property to competing properties. MANAGEMENT AGREEMENT. The management agreement is an employment contract between the owner and the manager, so it would address: 4. Manager’s compen- sation; 6. Manager’s responsibilities; and 7. Expiration date. 13  Property Management Instructor Materials Chapter 3 Quiz 1. Wally sets up his property management firm as 6. Which of the following statements about part- a sole proprietorship. Which of the following nership property is true? is NOT true? a) A partner can transfer his interest in the a) He doesn’t have to answer to anyone else partnership property to an outsider in the company b) A partner is not co-owner of the partnership b) He is not personally responsible for the property business’s debts c) The creditor of an individual partner may c) He is not required to disclose as much fi- attach a lien to the partnership property nancial information as with other business d) Title to the property must be held in the entities name of one or more partners d) This arrangement involves lower legal costs than other types of business entities 7. A real estate investment trust must meet a num- ber of requirements to qualify for special tax 2. All of the owner/investors have unlimited li- treatment. These include all of the following, ability if their business is organized as a: except: a) general partnership a) at least 100 investors b) limited partnership b) no foreign investors c) limited liability company c) 75% of investments must be in real estate d) corporation d) 90% of income must be distributed to inves- tors annually 3. All of the following are common forms of busi- ness organizations that real estate investment 8. A property manager is given broad authority syndicates often take, except for: to handle all matters concerning a property’s a) joint tenancy day-to-day operations, including hiring and b) limited liability company firing decisions and maintenance choices. Un- c) limited partnership der general agency law, the manager would be d) trust considered a/an: a) general agent b) limited agent 4. Who oversees the day-to-day operations of a c) special agent corporation? d) universal agent a) board of directors b) corporate officers c) general partners 9. A principal may be liable for a harm caused by d) shareholders an agent to a third party, so long as the agent was acting within the scope of his authority. This principle is known as: 5. Which of the following business entities is a) apparent authority subject to the problem of “double taxation?” b) imputed knowledge a) C corporation c) ostensible agency b) Limited liability company d) vicarious liability c) Real estate investment trust d) S corporation 14  Chapter 3: Working with Management Clients 10. All of the following would characterize an 15. The property’s owner is responsible for all of employee (as opposed to an independent con- the following obligations, except: tractor), except: a) advertising the property a) closely supervised by employer b) covering deficits in operating expenses b) hired to perform ongoing tasks, rather than c) insuring the property one task d) providing funds for capital expenditures c) taxes will be withheld from paychecks d) uses own judgment to perform a task 16. Which of the following methods of com- pensating a property manager might have 11. In addition to considering an investor’s finan- the unwelcome consequence of encouraging cial goals, a property manager should also increased tenant turnover? consider intangibles such as: a) Bonus for each new lease a) desire to provide something of social benefit b) Flat fee per number of units b) owner’s intended use of the property c) Flat fee per square footage c) pride of ownership d) Percentage of property’s gross income d) All of the above 17. Which of the following is not an important step 12. All of the following are true regarding a man- in the handover process, when one property agement agreement, except: manager replaces another one? a) it is a contract between property owner and a) Inspect the property property manager establishing their work- b) Notify all vendors and contractors as well ing relationship as tenants b) it is an analysis of the property’s charac- c) Prepare a market and regional analysis teristics compared with other properties d) Set aside at least one month’s working competing in the same market capital c) it may be required, under state law, to have a definite termination date 18. A tickler system is a/an: d) it must be in writing and signed by both parties, in most states a) accounting method of reserving funds for anticipated repairs b) grouping of folders for organizing tenant 13. A management agreement should contain all correspondence of the following, except: c) means of punishing tenants late on rent a) duration of the agreement d) schedule that reminds a manager when b) grant of authority periodic bills are due c) manager’s compensation d) proposed changes to rental rates 14. A property manager will be responsible for all of the following duties, except: a) arranging property repairs b) completing owner’s income tax returns c) handling payroll for employees d) paying regular operating expenses 15  Property Management Instructor Materials 19. Jerry finds that operating expenses for the month at the building he manages were much larger than usual. This is because several ap- pliances failed and needed to be replaced; the good news, though, is that their planned replacement in several years will no longer be an anticipated capital expenditure. The best way to bring this up with the building’s owner would be: a) e-mail b) in-person meeting c) line item in standard monthly report d) newsletter 20. Liquidated damages might apply if: a) a court finds that a manager’s civil rights law violations were especially egregious b) a judge finds that a manager violated the covenant of quiet enjoyment and construc- tively evicted a tenant c) a manager has to back out of a contract where the parties agreed that a certain sum would serve as full compensation for a breach d) the local multiple listing service finds that a manager has violated member requirements 16  Chapter 3: Working with Management Clients Answer Key 1. b) One major drawback for sole 7. b) To avoid the possibility of double taxa- proprietorships is that the owner is per- tion, an REIT must have at least 100 sonally liable for the business’s debts, investors and at least 75% of its invest- and the sole proprietorship’s creditors ments must be in real estate. 90% of its can go after him as well. income must be distributed to inves- tors each year. 2. a) In a general partnership, all of the partners have unlimited liability for the 8. a) A general agent has broad authority in debts and obligations of the partner- regard to a property. A special agent, ship. Each partner’s personal assets by contrast, has limited authority, often can be reached by the creditors of the just for one transaction. partnership. 9. d) Vicarious liability extends liability for 3. a) A joint tenancy is a way of holding an agent’s actions to a principal. The title to property, but it’s not a type of rules on vicarious liability vary widely business entity. from state to state. 4. b) The directors of a corporation appoint 10. d) An independent contractor is hired to the corporate officers (such as the perform a particular task and uses her CEO), who are responsible for running own judgment as to how that task will the corporation on a day-to-day basis. be performed. 5. a) A C corporation is subject to double 11. d) A property manager should consider taxation: first the corporation pays an investor’s nonfinancial as well as corporate income taxes, and then financial goals. shareholders pay personal income taxes on dividends. The other types of 12. b) A management agreement is the business entities avoid this problem. contract establishing the agency rela- tionship between owner and manager. 6. b) A partner is not co-owner of partner- A management proposal, by contrast, ship property; the property belongs to is a market analysis that may become the partnership and either is held in the basis for a management plan. the partnership’s name or in the name of one or more partners (though the 13. d) A management agreement sets forth all deed must make reference to the part- the terms and conditions of the rela- nership). tionship between owner and manager. It wouldn’t include proposals concern- ing rent or other operational changes; that would be found in a management proposal. 17  Property Management Instructor Materials 14. b) Duties that a property manager will handle include overseeing repairs, col- lecting income and paying expenses, and managing staff and payroll. 15. a) A property manager will usually handle advertising responsibilities. The owner is responsible for insuring the property, and providing funds for shortfalls on operating expenses. 16. a) A bonus for each new lease might cre- ate an incentive for a property manager to encourage turnover among tenants. 17. c) Handover procedures include in- specting the property, setting aside a working capital fund, and notifying parties. Market analysis would typical- ly be part of a management proposal, long before a new manager has been chosen. 18. d) A tickler system provides electronic reminders when bills, such as tax or insurance payments, are coming due. 19. b) If a monthly report is complicated be- cause of unusual expenses, it’s often a good idea to arrange an in-person meeting with the owner. 20. c) Some contracts, including many management agreements, contain a provision stating that a specified sum of money will be full compensation if the contract is breached. This helps the parties avoid the expense and uncer- tainty of a lawsuit. 18  Chapter 3: Working with Management Clients PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. Property Management Lesson 3: Working with Management Clients © 2021 Rockwell Publishing 1 Introduction This lesson covers: ⚫ types of property owners ⚫ the legal relationship between manager and client ⚫ working with a new client ⚫ communicating with clients ⚫ terminating a manager/client relationship © 2021 Rockwell Publishing 2 Types of Property Owners Types of property owners include: ⚫ sole proprietorships ⚫ business syndicates ⚫ corporations ⚫ general partnerships ⚫ limited partnerships ⚫ joint ventures © 2021 Rockwell Publishing 3 19  Property Management Instructor Materials Types of Property Owners Sole proprietorships Sole proprietorship: Business made up of one individual. ⚫ Most common form of business entity. ⚫ Simple and easy to form. © 2021 Rockwell Publishing 4 Types of Property Owners Sole proprietorships Advantages: ⚫ lower administrative and legal costs to set up ⚫ owner has complete control over: ⚫ management decisions ⚫ day-to-day operations ⚫ more privacy for owner (not as much financial information needed to form) Disadvantage: unlimited liability © 2021 Rockwell Publishing 5 Types of Property Owners Sole proprietorships Unlimited liability: Owner is personally liable for business’s debts. ⚫ If business cannot pay, creditors can collect from individual owner. Limited liability: Investors’ personal assets are protected from business liabilities. Example: corporations © 2021 Rockwell Publishing 6 20  Chapter 3: Working with Management Clients Summary Sole Proprietorships – Sole proprietorship – Unlimited liability – Limited liability © 2021 Rockwell Publishing 7 Types of Property Owners Business syndicates Syndicate: Business entity such as a corporation or limited liability company. ⚫ Title to syndicate property is held in business’s name, not individual’s. ⚫ Investors have limited liability. Advantage: investors can purchase larger properties than they could alone. © 2021 Rockwell Publishing 8 Types of Property Owners Business syndicates Syndicator: Someone who organizes a business syndicate (also known as a sponsor). Syndicator may: ⚫ manage property herself ⚫ hire a professional property manager © 2021 Rockwell Publishing 9 21  Property Management Instructor Materials Types of Property Owners Business syndicates Financial interests in syndicates may be securities (like stocks and bonds). ⚫ Subject to state and federal securities laws. © 2021 Rockwell Publishing 10 Types of Property Owners Business syndicates Common types of business syndicates: ⚫ corporations ⚫ general partnerships ⚫ limited partnerships ⚫ limited liability companies (LLCs) ⚫ trusts ⚫ joint ventures © 2021 Rockwell Publishing 11 Business Syndicates Corporations Corporation: A form of business in which an investor’s ownership is represented by stock in the company. Corporation may have: ⚫ many shareholders, publicly traded stock ⚫ few shareholders ⚫ Sometimes called closely held corporation. © 2021 Rockwell Publishing 12 22  Chapter 3: Working with Management Clients Business Syndicates Corporations Shareholder investment = operating capital. Dividends: Corporation’s income distributed to individual shareholders. © 2021 Rockwell Publishing 13 Business Syndicates Corporations Corporation must be organized according to state law. ⚫ Laws vary from state to state. ⚫ States require articles of incorporation filed with secretary of state. ⚫ Legally separate entity from shareholders. © 2021 Rockwell Publishing 14 Corporations Management Shareholders usually have very little managerial control. ⚫ May receive annual reports. ⚫ May vote on some major issues. ⚫ Managerial input is determined by: ⚫ corporation’s bylaws ⚫ amount of stock shareholder owns © 2021 Rockwell Publishing 15 23  Property Management Instructor Materials Corporations Management Real power is board of directors. ⚫ Govern corporation according to bylaws. ⚫ Appoint corporate officers. Corporate officers: President, CEO, vice president, treasurer, corporate secretary; they run day-to-day business of corporation. ⚫ Cannot convey or encumber real property without resolution of board. © 2021 Rockwell Publishing 16 Corporations Liability Primary advantage of corporations: limited liability. Example: shareholder buys $3,000 in stock. Company gets sued for $250,000 and goes out of business. Shareholder may lose $3,000 in stock, but creditor cannot go after shareholder’s home or other personal assets. © 2021 Rockwell Publishing 17 Corporations Taxation Major disadvantage with corporations generally: double taxation. ⚫ First, company pays corporate income taxes on profit. ⚫ Then, shareholders pay personal income tax on dividends. © 2021 Rockwell Publishing 18 24  Chapter 3: Working with Management Clients Summary Syndicates and Corporations – Syndicate – Syndicator – Corporation – Closely held corporation – Articles of incorporation – Corporate officers – Double taxation © 2021 Rockwell Publishing 19 Business Syndicates General partnerships General partnership: An association of two or more individuals who operate a business as co-owners for profit. ⚫ Created by express agreement (oral or written). ⚫ Written contract: terms of contract govern. ⚫ Oral contract: state law governs. © 2021 Rockwell Publishing 20 Business Syndicates General partnerships General partnerships: ⚫ no formal structure ⚫ easy to set up ⚫ partners share in profits and losses ⚫ partners all have voice in management of business ⚫ income isn’t taxed before distribution ⚫ each partner responsible for taxes on her share © 2021 Rockwell Publishing 21 25  Property Management Instructor Materials General Partnerships Liability Each partner has unlimited liability for acts of partnership. ⚫ If business cannot pay debts, creditors can go after individual owners’ assets. © 2021 Rockwell Publishing 22 General Partnerships Partnership property Partnership property: anything purchased with partnership funds. Title to partnership property may be held: ⚫ in partnership’s name ⚫ in name of one or more partners, as long as deed makes reference to partnership © 2021 Rockwell Publishing 23 General Partnerships Partnership property Partnership property not subject to claims by creditors of individual partners. Property acquired in partnership’s name can be conveyed only in partnership’s name. © 2021 Rockwell Publishing 24 26  Chapter 3: Working with Management Clients General Partnerships Partnership property Partner: ⚫ cannot transfer his interest in partnership property to someone outside partnership ⚫ can transfer interest in partnership itself ⚫ unless partnership agreement says otherwise ⚫ outsider gets share of profits, but: ⚫ is not partner ⚫ no management control © 2021 Rockwell Publishing 25 General Partnerships Partnership property When one partner dies: ⚫ interest in partnership property vests in surviving partners ⚫ deceased’s estate gets: ⚫ share of partnership profits ⚫ no interest in partnership property © 2021 Rockwell Publishing 26 Business Syndicates Limited partnerships Limited partnership: Association of two or more persons as co-owners of a business, with one or more general partners, plus one or more limited partners. Limited partner: A partner with limited liability and usually a limited role in management. ⚫ Protected from business’s debts. © 2021 Rockwell Publishing 27 27  Property Management Instructor Materials Business Syndicates Limited partnerships Limited partnerships: ⚫ more strictly regulated than general partnerships ⚫ usually require written agreement ⚫ often must register with secretary of state ⚫ if not registered, all partners may be considered general partners © 2021 Rockwell Publishing 28 Summary General and Limited Partnerships – General partnership – Limited partnership – Limited partner – Partnership property © 2021 Rockwell Publishing 29 Business Syndicates Limited liability companies (LLCs) Limited liability company (LLC): Entity that combines advantages of a corporation with advantages of a partnership. Created by: ⚫ LLC agreement, and ⚫ filing articles of organization with state LLC owners are called members. © 2021 Rockwell Publishing 30 28  Chapter 3: Working with Management Clients Limited Liability Companies Management Member-managed LLC: Every member has agency authority (can bind LLC with actions). ⚫ Decisions are made by majority of members. ⚫ Alternatively, LLC agreement may limit management powers to certain members (called “manager-managed”). © 2021 Rockwell Publishing 31 Limited Liability Companies Management Manager-managed LLC: Ordinary members do not act as agents, only managers do. ⚫ Designated managers may be appointed or removed by majority of members. All members have limited liability (like corporate shareholders or limited partners). © 2021 Rockwell Publishing 32 Limited Liability Companies Taxation No double taxation for LLCs. Income is taxed as personal income of each member (same as partnership). © 2021 Rockwell Publishing 33 29  Property Management Instructor Materials Business Syndicates Trusts In a trust, one or more trustees manage property for the benefit of one or more beneficiaries. ⚫ Trustees have powers granted in trust instrument that created trust. © 2021 Rockwell Publishing 34 Business Syndicates Trusts Real estate investment trust (REIT): A trust that is used to hold investment real estate. ⚫ Qualifies for tax advantages if it meets IRS requirements: ⚫ at least 100 investors, and ⚫ at least 75% of investment assets are in real estate © 2021 Rockwell Publishing 35 Business Syndicates Trusts REITs: ⚫ no double taxation so long as at least 90% of income is distributed to investors annually ⚫ investors are shielded from REIT’s debts ⚫ REITs are securities, subject to federal regulation © 2021 Rockwell Publishing 36 30  Chapter 3: Working with Management Clients Business Syndicates Joint ventures Joint venture: Created for a single project or a limited series of business transactions, rather than ongoing business. ⚫ Similar to a partnership. ⚫ Governed by same rules as partnerships. ⚫ Generally owners have unlimited liability. © 2021 Rockwell Publishing 37 Summary LLCs, Trusts, and Joint Ventures – Articles of organization – Member-managed LLC – Manager-managed LLC – Trustee – Beneficiary – REIT – Joint venture © 2021 Rockwell Publishing 38 Manager/Client Relationship This section covers the legal relationship between manager and client, including: ⚫ agency relationships ⚫ employment status ⚫ trustees © 2021 Rockwell Publishing 39 31  Property Management Instructor Materials Manager/Client Relationship Agency relationship Agency: When one person authorizes another to represent her in dealings with third parties. Agent: Person authorized to represent another. Principal: Person who authorizes the agent to represent him. Third parties: Persons outside the agency who deal with the principal through the agent. Subagent: Agent (representative) of the agent. © 2021 Rockwell Publishing 40 Agency Relationship Law Agency relationship has significant legal implications. ⚫ For third party, dealing with agent can be legal equivalent of dealing with principal. ⚫ In some states, principal may be liable to third parties for harm caused by agent’s wrongdoing. © 2021 Rockwell Publishing 41 Agency Relationship Law Agency law: Body of law that applies to agency relationships in nearly any context. ⚫ Lawyer/client; real estate agent/seller. ⚫ Usually property manager/client. ⚫ Varies from state to state. ⚫ Some states have passed real estate agency laws. ⚫ If so, real estate agency statute supersedes general agency law. © 2021 Rockwell Publishing 42 32  Chapter 3: Working with Management Clients Agency Relationship Law In states where the real estate license law regulates property managers, managers may have a duty to disclose agency status. Example: Manager may need to disclose that he represents property owner during lease negotiations, not prospective tenant. © 2021 Rockwell Publishing 43 Agency Relationship Agency authority Authority is usually described in the management agreement. ⚫ Principal grants manager authority to act on his behalf. ⚫ Defines extent (scope) of authority. General agent: Authority to handle all matters in certain specified areas. Special agent: Limited authority to do specific thing or conduct specific transaction. © 2021 Rockwell Publishing 44 Agency Authority Authorized actions binding on principal Principal is generally bound by actions of agent if those actions fall within scope of agent’s authority. Example: Property manager has authority to enter into supply contract on behalf of property owner; supply contract signed by manager has same effect as contract signed by owner. © 2021 Rockwell Publishing 45 33  Property Management Instructor Materials Agency Authority Liability for unauthorized acts Vicarious liability: Principal’s liability for harm to third parties caused by agent while acting within scope of his authority. ⚫ Actions may have been negligent or deliberate, such as intentional misrepresentation. ⚫ Rules vary from state to state. ⚫ Usually applies to employer-employee relationships as well. © 2021 Rockwell Publishing 46 Agency Relationship Fiduciary duties An agency relationship is a fiduciary relationship. Fiduciary: Person who stands in a special position of trust and confidence in relation to someone else. ⚫ Party has legal right to rely on fiduciary. ⚫ Law holds fiduciary to high standards of conduct. © 2021 Rockwell Publishing 47 Agency Relationship Fiduciary duties Agent owes fiduciary duties to principal from the first moment the agency relationship begins. ⚫ Agent must continue to fulfill those duties until relationship ends. Manager may be liable to client for damages that result from failure to fulfill fiduciary duties. © 2021 Rockwell Publishing 48 34  Chapter 3: Working with Management Clients Agency Relationship Fiduciary duties Fiduciary duties vary from state to state but generally include: ⚫ care and skill ⚫ obedience ⚫ utmost good faith ⚫ loyalty (avoid conflicts of interest) ⚫ confidentiality (even after agency ends) ⚫ disclosure of material facts ⚫ accounting © 2021 Rockwell Publishing 49 Summary Agency Relationships – Agent – Principal – Third party – Subagent – General agent – Special agent – Vicarious liability – Fiduciary duties © 2021 Rockwell Publishing 50 Manager/Client Relationship Employment status Independent contractor: ⚫ hired to perform a particular task ⚫ generally uses own judgment to decide how task should be completed © 2021 Rockwell Publishing 51 35  Property Management Instructor Materials Manager/Client Relationship Employment status Employee: ⚫ hired to perform whatever tasks the employer requires ⚫ usually told how to accomplish each task ⚫ supervised and controlled by employer ⚫ many employment and tax laws apply only to employees and not to independent contractors © 2021 Rockwell Publishing 52 Manager/Client Relationship Employment status Property manager is usually an independent contractor in relation to property owner. ⚫ May work for several different owners at the same time. ⚫ Sometimes known as “fee managers.” However, some managers work as salaried employees (mainly for institutional owners). © 2021 Rockwell Publishing 53 Manager/Client Relationship Trustees Property manager may act as trustee. ⚫ Trustee given legal title to a property. ⚫ Responsible for holding and managing property on behalf of beneficiaries. ⚫ Beneficiaries have equitable title to property. ⚫ Common in financial institutions. ⚫ Trustee is fiduciary. ⚫ Trusts are strictly regulated. © 2021 Rockwell Publishing 54 36  Chapter 3: Working with Management Clients Summary Employment Status and Trustees – Independent contractor – Employee – Fee manager – Trustee – Beneficiary © 2021 Rockwell Publishing 55 Working with a New Client When a manager begins working with a new client, she must: ⚫ determine the client’s goals ⚫ develop a management proposal/plan ⚫ establish a management agreement ⚫ follow handover procedures © 2021 Rockwell Publishing 56 Working with a New Client Determining the client’s goals Financial goals (return on investment): ⚫ high returns vs. low risk ⚫ income tax considerations ⚫ may change over time Nonfinancial goals: ⚫ pride of ownership ⚫ nonfinancial self-interest (owner’s own use of property) ⚫ social benefit for public or environment © 2021 Rockwell Publishing 57 37  Property Management Instructor Materials Working with a New Client Determining the client’s goals Other considerations: ⚫ client’s values, attitudes, and personality ⚫ Example: aversion to risk ⚫ whether client is reasonable/difficult ⚫ wants big changes but unwilling to invest time or money © 2021 Rockwell Publishing 58 Working with a New Client Management proposal/plan After determining client’s goals and values, manager prepares a management proposal: ⚫ analysis of property’s current status (physical, financial, operational) compared to competing properties in market ⚫ a list of recommended changes that would help client meet ownership goals When proposal is approved by client, it becomes management plan. © 2021 Rockwell Publishing 59 Working with a New Client Management agreement Management agreement: Contract that sets out working relationship between property owner and property manager. ⚫ Most states require agreement be in writing and signed by both parties. ⚫ Some states require definite termination date. ⚫ May have to comply with other rules, such as disclosure requirements. © 2021 Rockwell Publishing 60 38  Chapter 3: Working with Management Clients Working with a New Client Management agreement Should establish all the terms of the manager- client relationship, including: ⚫ identity of parties and property ⚫ duration of agreement ⚫ grant of authority ⚫ manager’s responsibilities ⚫ owner’s obligations ⚫ manager’s compensation © 2021 Rockwell Publishing 61 Management Agreement Identity of parties and property Agreement must: ⚫ identify owner and manager ⚫ be signed by both parties ⚫ more than one owner: signed by all unless one has legal authority to sign on behalf of other owners ⚫ entity: signed by authorized representative ⚫ manager may sign for management firm © 2021 Rockwell Publishing 62 Management Agreement Identity of parties and property Agreement must identify property to be managed. ⚫ Small property may use street address. ⚫ Large property should identify location, boundaries, and buildings. ⚫ Legal description usually not required but good idea. © 2021 Rockwell Publishing 63 39  Property Management Instructor Materials Management Agreement Duration Duration of agreement depends on: ⚫ type of property ⚫ client’s goals Agreement may: ⚫ set minimum term and provide for renewal ⚫ some states require definite termination date ⚫ lay out consequences for early termination © 2021 Rockwell Publishing 64 Management Agreement Grant of authority Agreement gives manager express grant of authority from owner to act on her behalf as: ⚫ general agent, or ⚫ special agent Agreement should note designated decision- maker for: ⚫ matters not covered by agreement ⚫ properties with more than one owner © 2021 Rockwell Publishing 65 Management Agreement Manager’s responsibilities Responsibilities depend on property and goals. Financial responsibilities include: ⚫ collecting income ⚫ managing accounts (trust accounts, reserve funds) ⚫ paying expenses ⚫ sending income to owners ⚫ handling deficits and audits ⚫ maintaining fidelity bond if required © 2021 Rockwell Publishing 66 40  Chapter 3: Working with Management Clients Management Agreement Manager’s responsibilities General management duties include: ⚫ managing staff and payroll ⚫ advertising ⚫ selecting tenants and entering into leases ⚫ contracting for supplies and services ⚫ arranging repairs and alterations ⚫ enforcing lease terms ⚫ providing financial reports to owner © 2021 Rockwell Publishing 67 Management Agreement Property owner’s obligations At minimum, owner must supply manger with information, records, and documents needed to manage property. Owner may also need to: ⚫ insure the property, add manager to policy ⚫ ensure compliance with laws ⚫ provide funds for shortfalls ⚫ provide funds for capital expenditures © 2021 Rockwell Publishing 68 Management Agreement Manager’s compensation Agreement should specify compensation: ⚫ how compensation is calculated ⚫ when and how it will be paid Compensation may be: ⚫ flat or fixed fee ⚫ percentage of property’s gross income ⚫ bonus for leases, renewals, meeting goals ⚫ fees for special services © 2021 Rockwell Publishing 69 41  Property Management Instructor Materials Working with a New Client Handover procedures Handover: Process of taking over management of property from owner or previous manager. Manager needs to obtain: ⚫ owner information (tax ID) ⚫ contact information (lawyer, contractors, insurance agent) ⚫ property information (building plans, floor plans, operating statement) © 2021 Rockwell Publishing 70 Working with a New Client Handover procedures Manager needs to obtain (continued): ⚫ accounts payable ledger (bills and account numbers, tax information) ⚫ leasing information and documents (leases, rent schedules and rolls, tenant information) ⚫ employment records (payroll) ⚫ bank account statements and funds access © 2021 Rockwell Publishing 71 Working with a New Client Handover procedures Steps involved in a typical takeover: ⚫ setting up recordkeeping system ⚫ setting up bank and trust accounts ⚫ establishing working capital fund ⚫ transferring security deposits (state laws vary) ⚫ notifying parties (tenants, contractors, bank) ⚫ inspecting property to note necessary repairs © 2021 Rockwell Publishing 72 42  Chapter 3: Working with Management Clients Working with a New Client Client records Manager has fiduciary duty of accounting, so a good system for recording and storing information is important. ⚫ Records can be kept electronically or in paper format. ⚫ Electronic records must be backed up regularly to safe, offsite location. ⚫ Paper records should be in fire-proof safe or safe deposit box. © 2021 Rockwell Publishing 73 Working with a New Client Client records Managers should keep folders for: ⚫ management contract, deed and title information, mortgage information ⚫ management plan and underlying research ⚫ correspondence with owner and tenants or customers ⚫ leases and tenant information © 2021 Rockwell Publishing 74 Working with a New Client Client records Managers should keep folders for (continued): ⚫ checks, receipts, budgets, and other financial information ⚫ insurance policies, claims ⚫ employee payroll, withholding ⚫ work orders, work logs, purchase orders ⚫ service bids, contracts © 2021 Rockwell Publishing 75 43  Property Management Instructor Materials Summary Working with a New Client – Management proposal/plan – Management agreement – Manager’s responsibilities – Owner’s obligations – Handover procedures – Client records © 2021 Rockwell Publishing 76 Communicating with the Client Management agreement should state: ⚫ what reports are required ⚫ when reports are due Type and frequency of reports depends on how involved client wants to be. © 2021 Rockwell Publishing 77 Communicating with the Client Reports Management agreement usually requires: ⚫ monthly financial report ⚫ rent roll (rent collection) ⚫ receipts and disbursements ⚫ net operating income ⚫ cash flow ⚫ quarterly and/or yearly financial reports ⚫ annual profit and loss statement © 2021 Rockwell Publishing 78 44  Chapter 3: Working with Management Clients Communicating with the Client Reports Management agreement should stipulate how client prefers to receive reports. ⚫ State law may require written reports. ⚫ Mail, fax, in person, electronically. Manager should keep copies of all reports. ⚫ State law may require copies kept for a certain amount of time. Managers generally use property management software. © 2021 Rockwell Publishing 79 Communicating with the Client Keeping in touch Besides reports, other methods of communication include: ⚫ telephone calls ⚫ email ⚫ personal visits ⚫ newsletters ⚫ blogs and websites Formal, in-person meeting for reports is best. © 2021 Rockwell Publishing 80 Communicating with the Client Consultation and decision-making Manager should get client’s input for non-routine decision-making. ⚫ When in doubt, ask. ⚫ More than one owner: consult with person who has decision-making power. ⚫ In emergencies: deal with problem, then fully report to client. © 2021 Rockwell Publishing 81 45  Property Management Instructor Materials Terminating the Relationship When a manager/client relationship terminates, manager must turn over: ⚫ property’s keys ⚫ operating funds ⚫ records ⚫ security deposits Larger properties may use termination agreement. © 2021 Rockwell Publishing 82 Terminating the Relationship Early termination Agency requires consent of both parties, so either party can withdraw from agency relationship at any time. ⚫ Early termination may be breach of management agreement. ⚫ Breaching party may have to pay damages. ⚫ Liquidated damages: When parties to contract agree in advance that a sum of money will be full compensation for breach. © 2021 Rockwell Publishing 83 Summary Communication and Termination – Type and frequency of reports – Methods of reporting – Termination agreement – Liquidated damages © 2021 Rockwell Publishing 84 46