Event: AIRE Lunch, Learn & Lead

Chris Gary

On Tuesday, March 11th, Chris Gary, Vice President with NAI Hiffman and 2014 AIRE president moderated a panel discussion on property management at The Rosewood Restaurant in Rosemont. Participants in this panel included:

Rich LeBrun – Vice President of Management Services Group, NAI Hiffman
Thomas F. Philbin – Vice President, Regional Manager, CenterPoint Properties
Ben Bischmann – Industrial Property Management Lead, Chicago, JLL
Vince Zuppa – Regional Property Manager, DOP-Chicago, Prologis

Gary – What do you feel are the key differences between the roles of an asset manager and a property manager?

Rich LeBrun

LeBrun – From a third-party perspective, we really see it’s more truly a property manager’s position. We really get involved with the day-to-day management of the asset.

Philbin – As a property owner, we handle things similarly. The property manager handles the day-to-day management of the building, while the brokers try to market the property and fill the empty space.

Zuppa – At Prologis we have 7,000 leases that we administer across the globe, and the more complicated the lease the more time it takes for our property managers to get them out. Our property managers also do lease administration, and a complicated lease can take a while to set up.

Philbin – One of the things we look at is how does the tenant fit into the building, and what are the aspects that will work. You don’t want to take the deal too far, and then find out that you don’t have something that the tenant needs. We try to look at each deal individually, and not stray too far during negotiations from the template we have in place.

Bischmann – As a third-party provider, we work with a number of clients, so we have to try to fit each client’s mold with the services we provide. It’s a little more complicated jumping from one owner to the next. As an example, we use about four or five different accounting systems depending on what the client uses.

LeBrun – We’re in the same boat. We have 60 different clients, so we’re doing things 60 different ways because each client has different objectives. Our job as a third-party management company is to ask these clients what their objective is and we have to manage to that. Some clients are capital-driven, some are value-driven, and some are in between.

Gary – Can you share a few things that would help the brokerage community if they better understood your role in the transaction?

Philbin – I’m effectively the leasing agent at CenterPoint for their central region portfolio. Our property managers have individual portfolios throughout the region and play a critical role in keeping the tenants and handling the leasing as well as managing the day-to-day operations in those buildings.

Zuppa – From an operation perspective, I would say communication is critical, so our property managers help to maintain the buildings. When we are showing a vacancy, we want to make sure that space is ready – we don’t want to have any surprises for anyone.

Bischmann – Property managers arrive at these buildings every day, every quarter, and every year and are reporting on the building. They consistently work with building owners on the investment strategy and how to drive value and the NOI. These property managers are a resource because they know the building inside and out. As a broker, you create that relationship with a property manager to better understand the markets and to build a better competitive set for your clients.

LeBrun – We don’t want to rule out property management from being asset for you guys doing more business. The more you tap into your property managers, the more you ask them questions, the more beneficial it could be to you as brokers.

Gary – How do you distinguish between tenant improvements and capital improvements?

Zuppa – To be quite honest with you, it’s all negotiations. There really is no formula to that. One of the real struggles we’re having with our portfolio is the severity of the winter we’ve had. We figure between snow removal, utility costs, and other factors, there’s going to be a 50% hit on capital due to this winter. Across the region we’re about $2 million over budget on snow removal.

Philbin – Anything that can have full residual value for the next tenant, we will capitalize that onto the lease, and it will be part of the base rent. If there is something tenant-specific that the next tenant may not need such as air-conditioning in the warehouse, that will simply be amortized into the net rent.

LeBrun – We don’t really look at capital totally outside of the transaction, it’s all a part of the transaction. A lot of owners are cash-driven, and a lot of time clients buy buildings as part of a fund, so there is really only one bucket of money. I would agree that if there is residual value, it will likely be a building cost versus a tenant-specific cost.

Gary – What determines what a management fee should be, and should it be billed as part of CAM or part of the base rent?

Zuppa – In our portfolio, it’s about fifty-fifty whether it is billed as part of CAM or not. It’s on a case-by-case basis, but the fee is a percentage of gross collections and is open for negotiation.

Philbin – We look at the management fee as similar to a developer that develops and building then takes a development fee. We provide services to the buildings and can provide full accounting for the building, property maintenance, and property management. In our case, it’s a fee-based expense that is run outside the base rent.

LeBrun – There’s always a management fee assigned to a property, regardless. It’s part of the ownership of the property. Whether or not it’s charged back in CAM is proportionate to the amount of services that we perform.