FEATURE ARTICLE, MAY 2007

THE KEY TO SUCCESSFUL INVESTMENTS
Property management companies provide essential tools to ensure owners maintain profitable investments.
Kristin Higueros

Higueros

Professional property management and leasing is fundamental for property owners to maintain successful and profitable investments. Third-party property management companies focus on the day-to-day operations of each property as well as are competitive in the marketplace to ensure each property performs to its maximum potential. Changing factors such as expenses, laws, economic factors and market competition require proactive management.

One of the tedious tasks property management companies have is working to lower controllable and non-controllable expenses. The cost of insurance has tremendously affected properties along the Gulf Coast Region. Before hurricanes Katrina and Rita, insurance was easily obtainable and rates were low. Once policies were up for renewal following these storms, premiums doubled in most cases and deductibles skyrocketed, leaving some property owners struggling just get their properties covered. Insurance has become a frequent topic of discussion when it comes to lowering expenses. Property management companies have combated the increase by offering their clients a master policy insurance program with lower rates. Increased utility costs have also become a huge expense that greatly affect office buildings and multifamily properties that run on chill water systems and/or are all bills paid. With the recent deregulation in Texas, management companies negotiate bulk electric agreements to lock in the lowest available rate.

Today, there is a revised State of Texas Franchise Tax that affects for-profit corporations and limited liability companies (LLCs) chartered or organized in Texas as well as foreign corporations and LLCs doing business in the state that could potentially lower reimbursements from pass-through expenses on office and retail properties. The margin tax is a new tax that is based on the margin between the total revenue and either employee compensation costs or the costs of goods sold (whichever is greater). The margin tax for most business will be equal to 1 percent of the margin, or 0.5 percent for retailers and wholesalers. The margin tax is being substituted for the recent decrease in school ad valorem maintenance and operations taxes. Currently, landlords are able to pass ad valorem taxes or escalations through to the tenants as an operating cost of the property, however if the lease does not allow for the landlord to pass through the margin tax, then the landlord may take a financial hit. Therefore, it is important that commercial leases be updated upon renewals and new leases to allow for a tax substituted for an ad valorem tax to qualify for the pass-through. 

An added source of income for apartment owners now is collecting reimbursements for water usage since they cannot pass-through expenses such as insurance and margin taxes. Therefore, property owners have begun to charge tenants for their water usage under the resident utility billing system (RUBS). This program bills tenants for their proportionate share of water usage based on square footage and number of occupants. Property management companies use third-party companies to bill the tenants but do spend time ensuring the tenants send in payment.

The burden of higher construction costs affecting build-out costs for new tenant spaces and renovation costs on properties also has been a hot topic of discussion, with construction companies reporting a steady increase in costs of approximately 1 percent per month. Last month, PR News Wire reported that Turner Construction Company announced its projected increase in construction costs. According to the Turner Building Cost Index, it is predicted the first quarter 2007 index will show a 1.59 percent increase in construction costs over the fourth quarter 2006 index and an 8.49 percent increase over the first quarter 2006 index. Karl Almstead, the Turner vice president responsible for the Turner Building Cost Index, said, “The volume of available work and limited availability of skilled labor in the commercial construction market continue to drive increased pricing from specialty contractors. The concrete, curtain wall, elevators, mechanical and electrical trades remain influenced by these factors in most geographic markets.” The good news is that this reportedly represents the smallest quarter-to-quarter percentage increase in the Index since the first quarter of 2004. However, even with the slight decrease build-out costs are still extremely high and greatly affect property owners either becoming a direct expense to the owner or are paid by the tenant in exchange for reduced rent or up-front free rent upon lease execution. Therefore, it is vital to get several bids before moving forward with tenant build-outs or renovations, an area of expertise for property management companies.

In addition to focusing on decreasing expenses and increasing reimbursements, marketing is a vital tool to maintaining strong occupancies for property owners. To stay competitive in the marketplace, property management companies subscribe to multiple on-line databases thus enabling them to continuously have up-to-date market information. Once they are armed with product knowledge of the market, it enables them to effectively market via real estate newspapers, internet marketing, direct contact via mail and phone, and flyers.

The perception many times is that property management companies simply collect the rent and pay the bills, however, do not forget about the other 80 percent of the job. To fully accomplish the necessary functions of managing real estate it takes a combination of property managers and accountants as well as aggressive marketing and leasing teams that work together with one common goal — to help property owners be successful in their real estate investments.

Kristin Higueros works in investment sales at Houston-based Tarantino Properties.


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