Management fees not being collected?

[Brant Garner]

So I’m working with a seller who self manages a retail center with five tenants. The leases for three of the tenants allow for management fees to be collected inside the CAM charges but they are not being collected. This would amount to about 20k per year if collected. I see this as a value add opportunity for a buyer. Will the average buyer see it the same way and how will they handle the situation with the tenants after closing? One of the tenants has about two years left while the other two have seven and ten years left.

[Joel Owens]

Hi Brant,

I have ran into this before with my clients when we purchase retail centers.

If the owner has been self-managing and not charging a fee it is very rare that the new buyer will be self managing unless local and even then likely not.

Sellers can try to say it is a benefit they have not been collecting but another way to look at it from a buyers perspective. Buyer is going to use  a management  company that charges XX fee.  Buyer needs to make sure no cam caps where buyer would have to pay some fees that could not be collected by tenants. The tenant mix matters as well (national,regional,local).

Local mom and pop tenant to regional feel the impact more of total CAM per sq ft increases above base rent.

So what we do typically is request a HOLDBACK from the seller for 6 months to 1 year for a certain amount. In this way if we are having a problem with tenants and CAM the funds can be pulled from the seller hold back instead of the new owners pocket. It gives time for the tenants to adjust to property management fees rising and CAM going up.

Another part is there is a CAM budget set each year and given to tenants of expected costs for next year. If PM was not shown as a cost then there may be an issue trying to charge for it.

As a buyer I would not look at PM fees not being charged as a bonus. I would see it as a headache that seller did not want to rock the boat so has been undercharging tenants and now I and the property manager coming in will have to fix the mess and get tenants acclimated to paying the new monthly costs.