So, rather than simply answer the question of a typical commercial property management fee, let’s take a look at the more typical services offered, in order that you can make a more educated decision as to what it is you really need as a commercial landlord.
As a commercial property investor, it remains entirely your choice as to how ‘hands on’ you wish to be as a commercial landlord. Many landlords rent out properties that neighbour their own, often on the same industrial centre or business park.
For them, the opportunity to respond to issues with tenants as and when they arrive is fairly simple, and as a result, they may even elect not to appoint a commercial property management company at all.
But that scenario really is more of the exception than the rule. Therefore, when landlords do look to appoint a commercial property management company, the first thing they need to decide is what their definition of management actually is.
It’s an important distinction to make. Property management companies offer a range of services to their clients. Fees within the UK run at between 4 and 12%, and naturally those landlords that are paying closer to that 12% are expecting a lot more from their commercial property management firm.
Many property management firms have their own maintenance crews, either as full time employees or as third party contractors on a permanent retainer. Other management firms will have much looser relationships with various contractors that are local to the property that is being rented. Location is an important factor here. If a commercial landlord in London is renting a commercial property in Manchester, there’s little sense in his or her retaining the services of a firm in London. This may seem like an obvious distinction, but if the contractors that are called out are not local, then travel expenses will increase as a result, and those fees will need to be factored in to the property management agreement.
As we’ve mentioned before, commercial property lease agreements vary from property to property. In many instances, the tenants will assume the responsibility for maintenance of the property. This is especially true when renting to blue chip clients who are more likely to have their own maintenance teams at their disposal and will simply not need the services of a management agent.
A commercial property management company offering a total management solution will also take on the responsibility of collecting the rent from tenants. This also includes the rather unpleasant business of having to evict tenants for non payment of their rent.
This eviction service is not purely for those tenants who are unable to pay their rent. Some tenants will behave in a manner which can be seen as disruptive to both the property and neighbouring business owners. Naturally, the whole process is somewhat unsavoury, so it’s best if it’s handled by a commercial property management company with experience in such matters.
On the positive side, this commercial property management agents can also take care of lease renewals from satisfied and reliable tenants. In either case, the agent will be taking a percentage of the rent as a fee, and this figure will form part of the 4-12% that we mentioned earlier.
There are actually two types of fee structure at work here when it comes to rent collection. The first is the model explained above, where the property management agent simply takes a percentage of the rent paid – more about that in a moment. Naturally, this model works very well for both landlord and management agent alike, as the management agent is incentivised to keep tenants in the property, as well as quickly source new tenants once the existing ones serve notice to terminate their lease.
The second option is to agree a flat fee with the property management company. This can be of benefit to commercial property owners who have buildings in an area that shows rental increased, year upon year. By setting a flat fee, they are locking the price in for a fixed period. The management company is satisfied because their fees are guaranteed, and there are also plenty of commercial property owners who do not necessarily concern themselves with occupancy rates, as such micro management would form part of their agreement with their commercial property manager.
We mentioned briefly that there was more to talk about in terms of the rent paid and the fee that goes to the agent. This is where it is vitally important that the terms and conditions of the management agreement are checked thoroughly, and the terminology to look out for is “rental value” or “rent due” versus “rent paid”. If the first two are in play, then the management agent has less of an incentive to find tenants as quickly as possible. Again, for many commercial property owners, this is not a major consideration, but it is worth mentioning here.
Whether on a flat fee or a percentage of the rents paid, commercial property management companies do need to find tenants for your property. In order to do so, they will need to advertise, and like all effective forms of property marketing, this is going to incur an expense.
As with everything else we’ve mentioned so far, contracts between property management company and commercial property owner vary, and the allocation of an advertising budget is no different.
Many management firms will simply factor their advertising costs into their fee. They’re not really ‘swallowing’ the expenses here, but they are not marking them up either.
Alternatively, some commercial property owners may have very good relationships with the media outlets with whom they choose to advertise, so they might choose to split the fee with the agent or pay for it entirely on their own. In the third instance, the management firm may simply pass all advertising costs onto the owner, and it’s in this instance that the commercial property owner needs to pay special attention to the agreement in place.
If they’re not familiar with the rising costs of advertising, they can find themselves presented with a surprisingly high bill, and of course, no guarantee of success from the advertising campaign in question.
Some Additional Fees
It would be overly simplistic to suggest that a typical commercial property management fee is anywhere between 4 and 12% and leave it at that. As is the case with all property, be it residential or commercial, there are going to be unforeseen expenses, and the terms and conditions of any property management company’s agreements will want to account for those.
It might make sense to allow the management company to assume the responsibility for all expenses, but that might not always be the best option from a financial sense. In the event of major problems, your own network of contacts may be able to offer a more cost effective solution, and it’s important that you have not signed an agreement which prohibits you from exploring that.
Some management firms may look to charge what’s known as a Vacant Unit Fee. This fee is usually in place to give the management company enough financing to begin the process of advertising for and thereafter sourcing your new tenant. Naturally, the process of securing that tenant and the mountains of paperwork that follow take time, and your commercial property manager would expect to be compensated for that time. A Vacant Unit Fee usually equates to one month’s rent.
Whether your property is vacant or not can have an effect on the monthly fee that the management company charges. If the commercial unit is vacant, then there is a good likelihood that the management fees will be reduced, sometimes by as much as 100%.
However, it’s worth remembering that whilst your property is vacant, a reduction in fees is little consolation against the fact that you’ll be responsible for the payments of a mortgage or any other loan secured against the property. Your management agent should be working hard to get your property occupied. If they’re charging nothing at all, you might be tempted to think that they are not as incentivised as a firm which charge a fee in order to market your property for you to prospective tenants.
Many agents look to charge a bonus for the sourcing of a new tenant. This really is the only ‘up front’ fee that you should take seriously, and it can come in various forms. At it’s most basic level, a fee of up to 50% of the first month’s rent is taken as a fee for the placement of a new tenant. Other management firms may insist on at least two month’s rent up front or a flat up front fee. It’s not really a hidden expense, and many may argue that it seems unfair to pay a company bonuses for doing the job that they were hired to do in the first place.
But that is an important distinction – the commercial property management company does not necessarily have to take any of the responsibility of sourcing new tenants for you. You may well prefer to utilise the services of a commercial estate agent for that, and if that’s the case then of our spectrum of between 4 and 12%, you’d certainly expect the management fee to be closer to 4%.
So, what is the typical fee that you should expect to pay for a commercial property management firm to look after your commercial property investment? As we hope we have demonstrated, it really boils down to just how much service you actually require.
At Prideview, we are expert commercial property agents in London and we can talk you through the range of management options that are available to you. Contact us and one of our experts will be happy to help.