Negotiating Property Management Fees
Tenants should practice situational awareness when being asked to pay a property management fee in a lease. Although property management fees can be reasonable for a tenant to pay, they should be considered in the context their responsibilities in the lease and the amount of fee being charged.
Property management fees are costs incurred by the landlord in order to manage the property and pay for related administrative tasks. When a tenant leases a property, landlords will often include such fees in the estimated operating expenses paid by the tenant on a monthly basis.
Since the landlord usually sets the property management fee, the tenant has no control on the amount being charged or how such charges compare with what is actually being managed. In industrial real estate, landlords typically will agree to property management fees of around 3% of the gross payable rent but such fees are subject to change on a case-by-case basis and are often part of cost centers for the management of larger industrial portfolios.
So how can a tenant negotiate property management fees to make sure the amount they are being charged is appropriate?
Review their responsibilities for maintenance in the lease. There is a significant difference between how much a landlord or their property manager will need to manage a triple net property and a multi-tenant project with a significant amount of common areas.
Consider the amount of property management fees being charged. It may not be reasonable for leases with large rental payments to be subject to a property management fee as a percentage of gross payable rent. As way of an example, a 500,000 square foot industrial space in Los Angeles could easily generate a gross payable rent of $500,000 per month or $6,000,000 per year. 3% of $6,000,000 is $180,000, which would likely be excessive considering the actual cost of management.
Understand that the market is a consideration in paying property management fees. If landlords are able to obtain property management fees from another tenant, all else being equal they will not agree to discount or eliminate property management fees regardless of the above arguments. Tenants should rely on their real estate advisors to provide what is normal and typical in a market, but still not shy away from trying to get any unreasonable fees eliminated from operating expense pass-throughs.
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