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Operating Costs

Having a dispute with a tenant or landlord? Rental Law discussion

Operating Costs

Postby Rushe » Fri Dec 02, 2016 10:08 pm

My lease states that operating costs shall include "reasonable and customary expenses actually incurred by the Landlord, on a nonaccrual basis, ... including property management and administrative fees." Firstly, what would reasonable and customary property management fees be?  Secondly, does the Landlord have to actually pay the fees in order to include them in the operating expense reconciliation.

ANSWER: Matt:

Determining "reasonable and customary" property management fees is a difficult two step process.

First you must determine the services that are being provided for the fee being charged.   Does the managing agent simply collect the rent, pay the bills and send any surplus to the landlord each month?    Or does the managing agent collect the rent, review the bills, pay the bills, bid and accept the all contracts for services at the property, monitor and manage the contract services on a daily basis, oversee the operations of the mechanical equipment, hire and fire on site employees working at the property, assure that the property has an aggressive and prudent leasing program that is keeping the vacancy within an acceptable range, meet often with the property owner to provide updates about significant operational events and give advice regarding changes that need to be made on site, provides all the bookkeeping and accounting services necessary, etc. etc.  Property management services can be quite limited, reasonable, or exorbitant.   The point is, you must know the services being provided to know what the appropriate fee should be.

Secondly, once you know which management services are being provided you can determine what the "market" priced fee should be for the particular bundle of services being provided.   Management fees can vary dramatically depending upon the market area you are considering.  You can contact the management companies in your market area and ask a knowledgeable manager how they do their pricing or tell them the services provided at your property and ask them what a "reasonable and customary" fee should be.

Note that management fees can vary depending upon the impact of many special circumstances.  For example if a company does a quality job at a certain property for a year receiving a four percent fee, the property owner may tender management of ten more of his properties needing management services in the vicinity if it will contract to manage all eleven properties for a three percent fee.  Most management companies would find the new offer highly acceptable. If you have in your lease the right to audit the landlord's supporting records of the operating costs being assessed to you, review a copy of the landlords management contract which should detail exactly what services the managing agent provides in return for the fee indicated in the contract. I cannot give you a legal opinion because I am not an attorney, however, in my opinion, the books and records for a property must reflect the actual transactional records showing that the management and administrative fees being assessed as operating costs were in fact paid to the managing agent in accordance with the terms of the applicable management contract.    

My experience suggests that most judges hearing Landlord/Tenant cases regarding questionable operating costs being assessed to tenants are keenly interested in the "reasonableness" of the charges and accounting evidence germane to the case.     

Regards,

-Jim  

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

Thank you for the response.  To clarify one point, the Landlord is not using a managing agent but is managing the property themselves.  This is a small property so there in not much to managing the property other than collecting rent and handling minor maintenance issues.  There was no management fee included in the original estimate of operating expenses but they are now trying to tack on a 4% retroactive fee for all years. This doesn't seem right.
Rushe
 
Posts: 47
Joined: Mon Jan 06, 2014 12:07 pm

Operating Costs

Postby Cadwallader » Sat Dec 03, 2016 10:05 am

Matt:

Depending on the landlord/tenant laws in your marketplace, your landlord may or may not be legally allowed to back charge tenants for fees that it "overlooked" in prior years.  Sometimes the L & T laws are openly available for tenants to review online by going to the county or state government web site.  It is also possible that you will not recognize some or all of the legal provisions that relate to your problem because of the legalese text.

If applicable in your area, you could go to the landlord/tenant courts and you will usually find several attorneys that specialize in such L & T matters waiting around for one reason or another and ask them if back charging for "overlooked" management fees is legally acceptable in your area, especially when they were not included in the original estimate of operating expenses(If the estimate is not included in the text or exhibit of your lease, you may need to have other evidence - such as the landlord's correspondence - to prove management fees were not included in the original estimate provided you).  Going to the courthouse also allows you to preview the local attorneys in action if you consider hiring one of them.

You could also call the local Bar Association and tell the receptionist that you are considering hiring an attorney regarding a Landlord/Tenant matter and do they have an attorney that is qualified to answer some questions regarding your case.  Commonly the attorney will ask you some basic questions about certain terms of your lease and quickly tell you if they believe your legal effort would be successful   

Additionally, if the management fee was not included in the original estimate of expenses, adding it later is unfair and self-dealing by the landlord/manager, and perhaps a failure to disclose a material fact.  The landlord also must add the 4% for management fee to the original operating expense estimate or it is essentially giving itself a rent increase that is NOT "reasonable and customary", certainly not a cost a reasonable man would anticipate from reading the terms of your lease.   Although I am not an attorney, and without reviewing all the terms of your lease, you seem have a strong argument. You should also be watchful for excessive "administrative charges" that a landlord/managing agent will sometimes use to increase income for the property.  Although many operating expense provisions provide for "administrative fees", those charges can also be suddenly and dramatically increased.

If there are other tenants leasing space at your property, you might ask them if they have gotten similar added charges for the new management fee.   Another tenant may have negotiated different terms in their lease, however, if one or all also have a similar problem with the new increase for a management fee, it may be helpful to know in dealing with this problem.

Finally, since the economic downturn began several years ago, and like most other businesses, many property owners have had to struggle and look for creative ways to generate more income.  Do you notice if the property you lease has experienced continued vacancy, or that the property has skipped some of the usual maintenance like painting the common areas, failing to re-stripe the parking lot, some of the exterior lighting needs repair, etc.?   These MIGHT be signs that your landlord is experiencing financial problems and indicate it is trying to pass on these "new" management fees to meet its own financial pressures.

Most landlord's have far more experience than tenants in these matters, are excellent negotiators and will do everything they can to intimidate tenants into believing that they will crush them in court if they do not "Pay Up" immediately.  Perhaps your landlord will be more reasonable, but it would be wise to discuss the salient points of your case briefly with an experienced Landlord/Tenant attorney in your area.      

Good luck.

-Jim
Cadwallader
 
Posts: 46
Joined: Sun Jan 05, 2014 4:02 pm

Operating Costs

Postby Nawkaw » Sun Dec 04, 2016 4:03 am

My lease states that operating costs shall include "reasonable and customary expenses actually incurred by the Landlord, on a nonaccrual basis, ... including property management and administrative fees." Firstly, what would reasonable and customary property management fees be?  Secondly, does the Landlord have to actually pay the fees in order to include them in the operating expense reconciliation.

ANSWER: Matt:

Determining "reasonable and customary" property management fees is a difficult two step process.

First you must determine the services that are being provided for the fee being charged.   Does the managing agent simply collect the rent, pay the bills and send any surplus to the landlord each month?    Or does the managing agent collect the rent, review the bills, pay the bills, bid and accept the all contracts for services at the property, monitor and manage the contract services on a daily basis, oversee the operations of the mechanical equipment, hire and fire on site employees working at the property, assure that the property has an aggressive and prudent leasing program that is keeping the vacancy within an acceptable range, meet often with the property owner to provide updates about significant operational events and give advice regarding changes that need to be made on site, provides all the bookkeeping and accounting services necessary, etc. etc.  Property management services can be quite limited, reasonable, or exorbitant.   The point is, you must know the services being provided to know what the appropriate fee should be.

Secondly, once you know which management services are being provided you can determine what the "market" priced fee should be for the particular bundle of services being provided.   Management fees can vary dramatically depending upon the market area you are considering.  You can contact the management companies in your market area and ask a knowledgeable manager how they do their pricing or tell them the services provided at your property and ask them what a "reasonable and customary" fee should be.

Note that management fees can vary depending upon the impact of many special circumstances.  For example if a company does a quality job at a certain property for a year receiving a four percent fee, the property owner may tender management of ten more of his properties needing management services in the vicinity if it will contract to manage all eleven properties for a three percent fee.  Most management companies would find the new offer highly acceptable. If you have in your lease the right to audit the landlord's supporting records of the operating costs being assessed to you, review a copy of the landlords management contract which should detail exactly what services the managing agent provides in return for the fee indicated in the contract. I cannot give you a legal opinion because I am not an attorney, however, in my opinion, the books and records for a property must reflect the actual transactional records showing that the management and administrative fees being assessed as operating costs were in fact paid to the managing agent in accordance with the terms of the applicable management contract.    

My experience suggests that most judges hearing Landlord/Tenant cases regarding questionable operating costs being assessed to tenants are keenly interested in the "reasonableness" of the charges and accounting evidence germane to the case.     

Regards,

-Jim  

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

Thank you for the response.  To clarify one point, the Landlord is not using a managing agent but is managing the property themselves.  This is a small property so there in not much to managing the property other than collecting rent and handling minor maintenance issues.  There was no management fee included in the original estimate of operating expenses but they are now trying to tack on a 4% retroactive fee for all years. This doesn't seem right.
Nawkaw
 
Posts: 37
Joined: Fri Jan 10, 2014 3:37 pm


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