Fee-Based Property Management

Can somebody lay out the general pay structure for a standard fee-based management contract? Is it generally a standard flat percentage across the board, or do they generally increase the percentage once certain milestones are hit?

Brent,
I currently work with over 60 fee agents, and 99% of those contracts are on a straight percentage of revenue, or $ per door. Only on deals with HUD Section 8 contracts do we see an additional fee for accounting.

I do not like the idea of an increase fee for milestones, as many times they will make those milestones at the expense of the community. It also is more work for our accounting department or asset managers to track.
Michael

Thanks for the info, Michael. Can you explain how those milestones can be at the expense of the community?

I'm curious because about a year ago I had a conversation with a friend where we discussed disincentives to excel beyond a certain point because every incremental amount of effort that would increase profit by let's say $100 only netted the management company a few dollars based upon the fee. Therefore, it was in their best interest to put resources only to getting the "low hanging fruit" and nothing more because the incremental profit did not match the incremental effort to get that profit.

Can you explain?

Brent,

When we had an NOI bonus in our management agreements sometime ago, we found that agents would not pay bills or would pass on preventative maintenance just to get to that NOI bonus.

The large agents I work with today would love to get away from the % based struture, but I don't think the industry is ready for that.


The portfolio that I work with is 100% LIHTC, and what we have found that works great for everyone is an NOI bonus for the site staff. The bonus is structured that if they get all the files passed by compliance on the first time, they can get an NOI bonus, if it takes 2 times, the NOI bonus % falls. The less time that agents back office has to be involved in approving files, is direct profit to thier overhead. I think this is the best win win for the owner and agent.

Hope this helps.

Michael, thanks for the continued information. I can definitely see how the structure of the bonus or incentive plan is key and that no matter what rules you make, there will always be those that try to manipulate the process. I suppose it comes down to whether the related costs to the incentive structure are greater or less than the reduced effort that results from a set percentage fee.

Considering single-family housing has the same problem with their brokerage fees, we'll probably get more data on this relatively soon from one source or another.