Property asset management is simply property management with an eye to a greater context than that in which the property exists. That context is usually a business other than owning and managing real estate. Examples might include manufacturing, warehousing, retail sales, research and development or office space for the executive branch of the business. Whatever the context, the goal of property asset management is to treat the real estate as a stand-alone enterprise and maximize its value.
A stand-alone real estate business is valued based on the net income it produces. If the real estate has not been properly maintained, the cost to bring it into good repair will be deducted from the value indicated by net income. You then want to know how to maximize the net income of a piece of real estate.
There are four general categories of costs: real estate taxes, vacancy, utilities, and maintenance. Real estate taxes usually consume between 15 percent and 20 percent of a property’s income. Differing taxing jurisdictions, both within a state and between states, have different taxing schemes, so the exact percentage may be higher or lower. Real estate taxes are the most difficult expense to reduce. Wise property asset management will seek to reduce the tax assessor’s valuation in recessions.
Vacancy is the next largest cost. From 9 percent to 18 percent of the scheduled gross income may be lost here. When a tenant leaves, the landlord incurs lost income, the cost of painting and recarpeting, the cost of new “tenant improvements,” improvements that are specific to the needs of the tenant, and the costs of leasing, such as advertising and legal costs associated with lease preparation and review.
Prudent property asset management will minimize turnover, even at the cost of not always achieving maximum rents. Reducing the rent for existing tenants by a few dollars a month is less expensive than the costs associated with the tenant leaving. Conversely, it is cheaper to let the space remain vacant a little longer than to rent it to a tenant who can’t afford it or one who has significant credit problems. The only thing more expensive than losing a good tenant is evicting a bad one.
Utilities are a significant cost to the landlord in high-rise office space but not in strip shopping malls, where the spaces are usually individually metered. In the context of property asset management, utilities are important because the greater business enterprise is paying them either directly or indirectly. Lighting, heating and air-conditioning are now normally controlled by computers, heat sensors and motion detectors. Be sure these are present and up to date.
Maintenance, which should consume from 8 percent to 12 percent of the rent being charged, is a favorite place to short-change the real estate. Failure to keep the property in good repair is a poor property asset management strategy. Problems tend to grow over time, and repairs cost multiples of what they would have cost had they been done when they should have been. On the other hand, buying unnecessarily expensive fixtures is money wasted, no matter which executive wants them. The best strategy is to repair the property correctly and when appropriate, but avoid over-paying or over-improving.