Management Fees

[MacDougal]

What is your definition of Gross Rents that you normally see in a contract between an owner of a strip mall and the property management company.  I have seen several different definitions and not sure who to believe.

ANSWER: Hi David,

"Gross Rents" in and of itself does not have any one set definition.  In part it depends upon how it is being used, and ultimately, how it is defined in any given lease.

Your subject was "Management Fees", so I am assuming that you are referring to the use of the phrase "Gross Rents" as it applies to operating costs.  Do be sure to clarify if that is not correct.  In this context, "gross rents" would refer to all rents collectible by the landlord.

There are other uses for the phrase as well.  A more common use of the term would be respecting how rent is calculated and collected by the landlord.  A tenant in a strip center could be paying "net rent," meaning that the rent that they are charging the tenant is net of all costs.  In other words, the tenant pays the costs of operating the center, such as property tax, utilities, insurance, management, clearing of snow, etc. on TOP of the net rent that is being paid.

On the other hand, a tenant may be paying "gross rent" meaning that they pay a single rent to the landlord, from which the landlord must pay for all of those costs of operation.

The former is riskier for the tenant, as they bear the burden of any unexpected increase in costs of operation, whereas the latter is riskier for the landlord.

Ultimately, it is the lease that defines the phrase.  You mention having heard several different definitions, and that you are not sure who to believe.  Truly, believe the lease.  There can most certainly be different definitions from lease to lease, and to correctly ascertain the meaning, you must dissect the lease itself.

I hope that this offers some clarity.  If I have missed the full nature of your question, please do not hesitate to ask a follow-up question with a little more context so that I can better address it.

All the best,

John Smiley

---------- FOLLOW-UP ----------

Thank you for your time.  A little more clarity from my end.  A Property Management Company will charge a fee based on Gross Rents. In this context, does Gross Rents typically include all additional rents such as CAM Fees, Tax Reimbursements, Insurance reimbursements, any other recovered costs and/or any addtional income such as parking fees etc.?

[Clinton]

Hi David,

Thanks for clarifying.  I understand better now what it is that you are asking.

I wouldn't say that there is any "typical" in this particular matter.  Like the CAM charge descriptions can vary, so can these.  I would say that more often than not where the management fee that is based upon gross rents, that includes all rents, including CAM recoveries, property and similar taxes, insurance expenses, and parking income.

I have had success in having landlords agree to remove insurance expenses from that calculation, and somewhat less often, removing property tax expenses.  These of course can be huge expenses, and can make a real difference to the amount being collected.  I could make a similar argument on parking income, though I've no tested track record on being able to exclude that.

In the end, it is all negotiable, depending upon the importance of the tenant to the landlord.

All the best,

John