What questions should an operator ask when evaluating a REIT’s third-party management service?
Halverson: It’s critical for an operator to not only look at the management fee and concessions. The ability to grow revenue must be evaluated. An operator should also talk with references and others who use the same management company. Being able to effectively communicate and partner with a management company is key to success.
Payne: [They should ask] what is the term of the agreement and termination fees to get out of the agreement? What level and type of communication will be available to the owner? Is there a regional manager responsible for the store, and the frequency of property visits/inspections? What’s covered during those onsite meetings? What types of audits are done at the store and by whom? What’s included in the management fee? What’s the policy on tenant insurance and how are commissions/proceeds paid out as ancillary income?
Shipley: It starts with people. Do I trust the people with whom I am entrusting my investment? Will they treat my asset as their own? Who will be managing my relationship? Do I have confidence in their operating platform? What’s their record of improving performance at assets that are comparable to mine? Will they give me a fair shake if I ever decide to monetize my investment and sell? What’s their reputation as a buyer?
What does the contract generally cover? Are there excluded items of which an owner should be aware?
Payne: Most contracts are inclusive of all property functions including personnel management. Store-level expenses are typically the owner’s responsibility, and most corporate-level expenses are part of the management fee. Exclusions to this may include fees or expenses for marketing, call center, software and IT support. There may also be fees associated with new project management as in the case of a property expansion.
Shipley: [It covers] human resources—hiring, training, oversight and career development of onsite staff, administering and managing of all employee payroll and benefits. Marketing—development and execution of a full marketing plan, including local and Internet marketing to drive online visibility and generate as many leads to your facility as possible. Access to national sales centers is also included in management contracts, eliminating the need for an outside third-party call center. Revenue management—continuous monitoring and adjusting, where necessary, of rates, promotions and discounts to ensure the optimal balance of rates and occupancy and maximize every potential dollar of revenue. Risk management—oversight on all legal areas surrounding lien laws, tenant insurance and employee-related legal matters. In addition, support on issues related to general casualty and liability insurance. Accounting—full-service accounting, including payables, sales and other operational-based tax filings, detailed monthly financial statements, lender reporting and, of course, complete audit programs in place to monitor and control all cash and ensure protection of all facility assets. Assistance with real estate tax appeals, often resulting in significant savings in real estate taxes.
What kind of fees can an owner expect to pay?
Payne: Owners can expect to pay a variety of fees and each should be clearly communicated up front. Some may be packaged, others a la cart, including startup fee, management fee, call center, software/IT and support, and Web marketing.
Shipley: Management fees are typically 6 percent of property revenue.
What level of control does the owner retain in the operation of his business?
Halverson: The owner is ultimately in control of his asset. Extra Space manages the day-to-day operation based on an agreed upon budget and plan for the property. All deviations from that plan are discussed with and approved by the owner.
Payne: The owner should always have the ability to discuss questions or concerns with a relationship manager. We discourage direct dialog with the store manager, as it can be counterproductive should he receive conflicting messages. By establishing communication protocol at the beginning of the relationship, the store manager receives consistent communication from his supervisor, based on shared objectives.
With regard to financials and property maintenance, the owner should have a role in the budget review process, the ability to approve and set capital expenditures, and the right to receive all pre-determined financial reports. These are all the details both parties will want defined and agreed upon prior to entering into an agreement.
Shipley: Good third-party managers will customize the relationship based on the preferences and objectives of the owners. That said, the most successful third-party management relationships are those in which the owner, while maintaining a seat at the table for significant strategic decisions, is willing to leave day-to-day operational decisions to the management company.