Paying Property Manager from NOI, instead of gross...

[Marc C.]

Has anyone ever had a property manager accept a percentage of the NET vs. the gross? In that way, they are encouraged to keep expenses under control...something they usually have a problem with. (My current manager is proposing 12% of the gross, including paying for the expenses of a part-time on-sight manager. Seems really high to me.)

So, what about, beginning of the year, let's see them create a 2017 budget for the property, then STICK to it, and get paid from the NOI.

Anyone ever tried that?

[Tyson Hosey]

@Marc C. Ooooo I like that. Wonder if PM's would do that.

[Ravi P.]

Originally posted by @Marc C.:

Has anyone ever had a property manager accept a percentage of the NET vs. the gross? In that way, they are encouraged to keep expenses under control...something they usually have a problem with. (My current manager is proposing 12% of the gross, including paying for the expenses of a part-time on-sight manager. Seems really high to me.)

So, what about, beginning of the year, let's see them create a 2017 budget for the property, then STICK to it, and get paid from the NOI.

Anyone ever tried that?

Paying from NOI would really put PM companies inline with owners interest. This seems like a great idea.

 I know in the Hotel industry I have seen management contracts structured with a hyrbid of your suggestion. They would negotiate 5 on top line revenue and 2 percent of bottom line. FYI Hotel PM contracts share the same concept but percentage is typically lower since they deal with higher revenue.  

[Chandra Venkat]

Seems like there is a variation of this theme on this thread. Except they talk about some equity, but I think at the end of the day it is some "skin in the game".

 

[Chandra Venkat]

[Account Closed]

Interesting idea. I've never seen it.

The issue I see is PMs cutting corners and delaying/not completing repairs to boost NOI.

[Michael Le]

@Account Closed, if they were getting paid bonuses based on NOI I can see that. If they have equity in a property then boosting NOI for the short term doesn't help them when they're stuck with the consequences of deferred maintenance long term.

[Marc C.]

Not sure I would want a PM as equity partner...too hard to fire. As for repairs eating up NOI, they are property managers: They should be able to build you a pretty decent budget for next year that shows what repairs will likely run, based on the other properties they operate.

[Account Closed]

@Michael Le I agree.  I didn't realize that there was an assumption that the PM had equity in the deal.

[Michael Le]

@Account Closed, actually that's my fault. I was mixing this up with another thread that was talking about having the PM be part of the equity partnership.

[Andrew Johnson]

I think you'd run into a couple of challenges:

1. Odds are they would start to pad the 2017 budget (or worse, increases expenses in the near-term to justify a higher budget in subsequent years) so they could hit their goals.

2. If there are unexpected expenses early in the year and it becomes apparent they won't hit their NOI goal then getting their attention/focus for the remainder of the year might be more challenging. I wouldn't argue that's the right thing to do, but it might be reality.

3. There's an inevitable emphasis on cheap repairs, maintenance, etc. or just plain deferring addressing things that need attention this year so that they can put them into next years budget (and raise the budget accordingly).  

That being said, there could be a middle ground where you have a 10% management fee with a potential 4% bonus if they hit NOI goals. If they perform, they do better than their proposal. If they don't perform, it's still a market-rate deal (part-time on-site manager aside).