Management fees not being collected?

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So I’m working with a seller who self manages a retail center with five tenants. The leases for three of the tenants allow for management fees to be collected inside the CAM charges but they are not being collected. This would amount to about 20k per year if collected. I see this as a value add opportunity for a buyer. Will the average buyer see it the same way and how will they handle the situation with the tenants after closing? One of the tenants has about two years left while the other two have seven and ten years left.

Hi Brant,

I have ran into this before with my clients when we purchase retail centers.

If the owner has been self-managing and not charging a fee it is very rare that the new buyer will be self managing unless local and even then likely not.

Sellers can try to say it is a benefit they have not been collecting but another way to look at it from a buyers perspective. Buyer is going to use  a management  company that charges XX fee.  Buyer needs to make sure no cam caps where buyer would have to pay some fees that could not be collected by tenants. The tenant mix matters as well (national,regional,local).

Local mom and pop tenant to regional feel the impact more of total CAM per sq ft increases above base rent.

So what we do typically is request a HOLDBACK from the seller for 6 months to 1 year for a certain amount. In this way if we are having a problem with tenants and CAM the funds can be pulled from the seller hold back instead of the new owners pocket. It gives time for the tenants to adjust to property management fees rising and CAM going up.

Another part is there is a CAM budget set each year and given to tenants of expected costs for next year. If PM was not shown as a cost then there may be an issue trying to charge for it.

As a buyer I would not look at PM fees not being charged as a bonus. I would see it as a headache that seller did not want to rock the boat so has been undercharging tenants and now I and the property manager coming in will have to fix the mess and get tenants acclimated to paying the new monthly costs.

Well there are ton of factors at play.

For a buyer it becomes what is the headache for the perceived return? If a buyer is paying  a low cap rate like a 6 to a 7 they want everything clean. What I mean by that is all long term leases, corporate credit national credit,rental increases,etc.

The more (hair) on the deal the more a buyer wants to raise the cap rate higher on offer price.

If you want you can send me the flyer on it and I will tell you what I think. Sometimes sellers want pricing of 6 to 12 months ago but the debt markets have went up 35 to 40 basis points on interest rate. When that happens there is often a 6 month lag between buyers expectations and the sellers.

Buyers see the change right away so make the adjustment on offer price. Sellers on the other hand are more resistant to change and have to mentally accept selling for a higher cap which erodes equity proceeds from the sale or they decide to take off the market. Another is the seller decides to just refi and put long term debt on the property and not sell. The price point makes a difference as well. If under say 3 million in price there are a lot of cash buyers not getting financing. if a buyer really wants a property they can give in a little on the cap rate paying all cash.

When the loan comes in that is when it can cause an issue because with smaller spreads between debt and sell cap rate the lenders want most of the cash flow to go to paying down the mortgage which reduces cash on cash proceeds to the buyer. That can often be a turn off to a buyer purchasing that has to use debt.

Sellers usually pray for a 1031 buyer who has a short fuse left 1 week or so to ID properties and has to dump into a property at a premium cap rate to avoid big tax penalties.

If your seller is selling at a great cap rate then buyers might overlook the problems to deal with.