Some property owners believe that the services of a professional management company are unjustifiably expensive. Viewing the management company as merely a middleman between themselves and various, more specialized service providers, owners do not always understand what the fee for a management company covers, not seeing the relationship between the amount asked for and the effort made.

The rate for professional property managers in the class A and B office sector can at the moment vary from 60 to 110 dollars per m² per year. The actual cost depends on many factors, for example on the technical and engineering condition of the building, its size, the number of services required, and the management company’s status. “There is no average rate for building maintenance at the moment,” believes Evgenia Vlasova, Managing Director of Sawatzky Project Management. Some owners require commercial management services – they entrust the management company with letting out space, insuring the property, and accounting services. Others only require the technical maintenance of their building, cleaning and security.” According to Aleksey Voskoboinikov, Business Development Director for M+W Zander, on average the cost of services in class A offices is around $70-110 USD per m² per year, and $50-80 per m² per year in class B offices.

In the retail sector rates for management are a little higher. “It is linked with retail properties specific maintenance needs. As a rule, the property works seven days a week. Seeing as the staff work more here, than in office buildings, the maintenance rates are higher. In a shopping center management can cost from 70 to 120 dollars per m² per year, and in some places as high as 160 dollars,” explains Marina Velikoretskaya, General Director of Colliers International FM. You must not forget that expensive marketing services are often included in the maintenance costs of shopping centers – attempts to attract shoppers, advertising, surveys, retail research etc.

What is covered by the price

The cost of property management services is comprised of several factors:

• expenditure on materials for the maintenance of the building (cleaning materials, spare parts, professional equipment etc.)
• the cost price of services, that is the man-hours of the staff (employees’ wages);
• the cost of subordinate organizations working on the property
• head office’s administrative expenditure on the management of a given building
• the management company’s fee.

At the moment professionals have two different approaches to the composition of a property management budget. The most widely used system is to present the owner with an open bill showing absolutely all expenditure on the building’s maintenance. “In this case the management company offers the owner a thoroughly worked out estimate for the year, which shows the cost of each of its components, including the management company’s fee,” explains Dmitry Filin, Senior Real Estate Manager at Hines. The advantage of such a bill for the owner is obvious – it is a completely transparent scheme and everything, like some expenditure on a subcontractors or materials can be checked by asking the management company for the relevant documentation. Apart from this, by giving a detailed schedule of spending, the property manager does not have a chance to deliberately lower the expenditure on the building’s maintenance in order to increase their own income. But there is a problem with this system.

According to specialists, property management companies using an open account system are not interested in saving their client money. All the purchases are made according to a confirmed budget and there is no reason to make efforts to minimize spending – the owner has already signed the estimate. The only way to stimulate the manager into lowering expenditure is to offer them a certain percentage of the money saved. Some western owners are now going for this system. However, some specialists do not welcome this sort of opportunity for economizing on maintenance costs. “Some people practise a system in which, according to a contract, the sum of the money saved on the budget by the management company is divided up between the company and the owner,” explains Olga Zorina, Head of Projects at Noble Gibbons in association with CB Richard Ellis. “That is not including the fact that the possibility of extra rewards will provoke management companies into unjustifiable economizing, which could have a negative effect on the building, the owner and his tenants. The quality of services could suffer or not all the services would be carried out in full. We decided not to practice this system because it had the potential quality conflict in the services provided.”

The second system is a summarized estimate, which is presented to the owner without detailing the expenditure structure. It often happens that the owner is only interested in the final figure, the total cost of management services. He does not have time to confirm everything and check every figure in the budget. In this instance the property management company does the budgeting themselves and then presents the owner with the total amount of expenditure. According to Dmitry Filin, the advantage of this system for the manager is that all the money that is saved goes to him. However, there is a serious disadvantage – if something is missing from the confirmed budget, or if the management company has made a mistake in the calculations (and it is fairly easy to make mistakes, if you consider that there is often not enough information about tenders to make up an exact budget), the company must bear the costs itself. If you look at this system from the owner’s point of view, then, it goes without saying that it less transparent, and, for the management company, there are a few ways of minimizing expenditure on maintenance in order to get extra profit (just as in the case of the confirmed budget when money saved was shared between the manager and the owner). The temptation is to economize on running costs and to invite cheaper subcontractors, which can have a detrimental effect on the management of the building. On the other hand, if a decent company is working on the property then this risk is basically non-existent, in as much as the managers has responsibility for work on the property: any self-respecting management company would hardly sacrifice its reputation for the sake of a small saving.

There is, however, also a range of property management services the cost of which is not included in the annual budgets described above, for example, the cost of consulting at an early stage of project development, or the cost of carrying out a tender. As a rule, these are one-off payments, given to the management company on the completion of work. “Services provided by a manager at the initial stage of project development include working out the marketing and technical concepts for the project, providing the project with a financial plan, including working out the best system for paying taxes, working out the legal system and so on, which all costs more than 20 tho. dollars. But it can reach 100 tho. if it is a large property which needs complex market research,” says Oleg Spivak, Director of the Retail Real Estate Department at ‘Becar Consulting.”

Reward for Bravery

A management company’s main task is work coordination. It is not important whether it carries out the services itself or invites in subcontractors, but it is important that that it organizes all the work in the property and directs it. The management company has to carry a risk: in the contract it is written that it is the manager who has responsibility for the quality of work carried out, despite the large number of subcontractors working for them. It is also important to remember that the management company not only directs all the activity in the property, but also does a lot of this work, and acts as a consultant on managerial difficulties.

Like the budget, the management company’s fee can be formed in numerous ways, depending on at what stage the management company was invited on board, and what services they provide the owner with. As has already been mentioned, the practice is now fairly widespread in which the manager is invited on board at the project development phase or even earlier – as the owner prepares for construction. “Considering that you can not get any income from a property for at least 1.5 – 2 years (bearing in mind the time needed for construction), the management company usually receives a fixed fee during the early stages of building, the rate of which depends on the extent of their involvement in the project,” explains Elena Shevchuk, Director of the Commercial Real Estate Department at GVA Sawyer. “However, after the property is up and running, if the owner entrusts the letting out of the property to a professional company, that the management company’s pay scheme will be tied to the total received income.”

When a property is given over to use, the management company’s fee can be a fixed rate per square meter of rented space. “There are no fixed calculations for working out the size of fee. We choose the fixed rate of out fee, judging by experience and the market situation. The size of the fee can vary from 6 dollars per square meter to 36 dollars per square meter of rented space. It all depends on the size of the building and the number of services,” says Olga Zorina. “We often use a precedent system in calculating the fee – if the management company operates a similar building elsewhere, with the same range of services, of roughly equivalent size, the rates will be similar.”

There are also combined systems, in which the owner earmarks a percentage of the income for the management company, while still guaranteeing the manager a fixed minimum, which does not depend on the amount of space let out. The latter is earmarked for the running of the space, cleaning, the organization of subcontracted work and so on.

It is worth noting, for fairness’ sake, that it is pretty rare for an owner to entrust the letting out of a property to a management company, meaning that the fee is calculated according to the amount of property let out. Therefore while it is possible to talk about payment for the running of a property, you can not say that they are paid for lease agreements. In this case the management company’s fee is, as a rule, a fixed percent of the annual management budget and not a percentage of the profit on the property. If the company does not have tenants then the fee is a fixed sum which is on average 10-20% of the total annual budget.

However, management companies, despite their aim to ‘maintain a price platform’ can be fairly flexible in their pricing policies. If work with an owner seems to have good prospects, it can lead to discounts and special treatment. “Sometimes we lower our fee in the hope that the owner will give us another property and extend out relationship,” explains Dmitry Filin. “Discounts are possible only if the job has good prospects. For instance, if we were invited in as consultants now, and then extended the relationship to have us as managers, then we would give them special treatment,” says Evgenia Vlasova. “As a rule, we offer a discount for the first year at a new property, when we conclude a three year contract.” “We offer discounts to clients with good prospects, especially of there is a chance to develop out company in the regions,” says Maksim Voskoboinikov. “As well as this, we aim to offer flexible conditions to ‘image’ clients, international clients with whom we work around the world. The discount may take the form of additional services as a bonus, or the use of certain software without increasing the price and so on.”

Accounts

One of a management company’s primary duties is preparing regular and transparent accounts for the owner of the building. The form of the accounts depends not only on the management company’s standards but also on the owner’s wishes. “At the contract signing phase the form and frequency of accounts should be agreed with the owner. The basis is a business plan. On this base you form the main account. It can be annual, monthly, quarterly or on the owner’s request,” explains Spivak.

As a rule, companies offer their clients several types of account, which allow the owner to receive timely and accurate information about all aspects of the functioning of their property: about the current condition of the technical systems, fittings and the building as a whole. It also documents the service history of that property.

Money talks

It is fairly difficult to predict changes in the cost of management companies’ services. On one hand, there are a number of factors, which create the growth trends in management costs: the development of management companies and the increase in the quality of the services provided, which is aimed at the increasing the demand for the services of external management companies, and the aim amongst Russian companies to match their prices to the prices charged by western companies working in the Russian market. On the other hand, according to expert estimates, there are other factors retarding price increases: the growth of competition between management companies, and the lowering of cost price spending on management, by increasing the level of professionalism. Come what may, experts believe that the rate for property management will be appropriate for the market situation, and for the general understanding of the specifics of management services in Russia.