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Chapter 8 – Property Management
In this lesson we review basic residential and commercial property
management concepts. The key elements of the HAR Standard Rental
Agreement and Property Condition form are discussed. Management
of retail, office and other types of commercial properties is reviewed.
Real estate property management attempts to balance the needs of a
property owner with those of a tenant.
A property manager managing residential properties is subject to the
Residential Landlord-Tenant Code. This law does not apply to
industrial and commercial real estate rental agreements, but does
apply to cooperative apartments and residential condominium units,
where management and maintenance of the property is essentially
the same as for an apartment offered for lease, except for advertising
and negotiating for tenants.
Residential rental agreements could be written or oral. The Hawaii
Association of Realtors® residential rental agreement may be used by
Realtors® or any other persons who wish to purchase it. Its use is not
required by the Real Estate Commission.
The two most common tenancies are fixed term and month-to-month.
With a fixed term rental, rent cannot be increased before the end of
the rental period and the landlord has no right to terminate the
agreement during the rental period unless the tenant fails to pay rent
or fails to comply with the terms of the rental agreement. With a
month-to-month rental agreement, the landlord can increase the rent
or terminate the agreement at any time with a 45-day notice. The
tenant may terminate the agreement with written notice no less than
28 days before the anticipated termination date. A 120-day written
notice is required if the unit is to be voluntarily demolished, converted
to a condo or changed to a transient vacation rental.
The Landlord-Tenant Code limits the amount of all deposits to no
more than one month’s rent. This includes the security deposit and any
deposits for keys, pets, or anything else.
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A security deposit may be used to remedy tenant defaults for
damages, failure to pay rent or failure to return keys; to clean the
dwelling unit, or to compensate if the tenant wrongfully quits the
dwelling unit. To retain any portion of a security deposit, the landlord
must give written notice of the reasons, itemizing all costs, within 14
days.
The Hawaii Association of Realtors®’ Security Deposit Statement shows
all deposits held by the landlord, and all charges the landlord is
claiming, itemized for such items as cleaning, pest control services,
repairs and replacements, unpaid rent, uncollected late charges and
uncollected interest, with a balance claimed by the landlord or due
the tenant. This or a similar notice, along with any portion of the
security deposit remaining, after deductions, must be given to the
tenant within 14 days after the termination of the rental agreement. In
order to limit disputes over the landlord’s right to claim any part of the
security deposit, the Code requires that the landlord provide a written
inventory describing the condition of the premises and any furnishings
and appliances, prior to occupancy, and give a copy to the tenant.
The Hawaii Association of Realtors®’ Property Condition Form can be
used for this purpose.
Neither the rental agreement nor the Code requires a final inspection.
However, an inspection is the best way to prevent disputes. HAR’s
Suggested Checklist for Vacating Tenants can be used for this purpose.
A landlord has the right to consider the unit abandoned if the tenant is
absent for more than 20 days without written notice and has not paid
rent for that period. He has the right to enter a unit, with at least two-
day notice, in order to inspect it, make repairs, decorate, supply
agreed services, or show the property to a prospective buyer, lender or
purchaser. He may terminate the agreement after giving notice, if the
tenant fails to either pay rent within five business days or to correct a
violation of the rules or damages within ten business days.
In classifying retail centers, a strip center is normally small in size, with
a convenience store as an anchor, for a trade area of the immediate
neighborhood; a specialty center usually lacks an anchor tenant, and
contains unique or specialty boutiques; a neighborhood center
typically contains 15 to 20 stores with one anchor tenant, and is
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supported by a trade area of up to two miles from the center; a
community center will normally contain 20 to 70 stores and two or
more anchor tenants, to serve a trade area extending out to around
three miles; and a regional center has up to 1,000,000 or more square
feet with several large anchor stores and an assortment of other
businesses for a trade area extending 10-15 miles.
Three common types of percentage leases are percent-only, variable
scale, and minimum percentage. This last type of lease is typically
found with larger, anchor tenants.
In an office building, the gross area is the total sum of all of the area
within the outside faces of the exterior walls; the gross rentable area
includes all areas within the outside walls except pipe shafts, vertical
ducts, elevator shafts, balconies and stairwells; the net rentable area is
the gross rentable area less public corridors, bathrooms, janitorial,
storage or electrical closets and any other area not available to the
tenants; the usable area is the area on any floor that can be actually
used by the tenant.
Industrial property includes all land and buildings involved in the
production, storage and distribution of goods and products. Most
industrial properties have little need for continuing, on-site
management. More often brokers will play a useful role in helping
manufacturers find properties for new plants or distribution facilities
and in negotiating leases.
Residential Property Management
Real estate property management attempts to balance the needs of a
property owner with those of a tenant. A property owner desires to rent
or lease space at a rate which will produce a return sufficient to pay
operating expenses and fixed expenses (e.g., property taxes, property
insurance and mortgage indebtedness), and provide a return on the
owner’s equity. The tenant wishes to rent or lease space at a rental
rate that is affordable or that will allow him to utilize the space at a
profit. Competent, experienced professional property managers are
able to satisfy the requirements of landlords as well as tenants, and
create net savings, rather than an expense, for the owner.
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While some property owners will administer the leasing, rent
collection, and maintenance functions directly or through salaried
employees, most owners of investment property contract for property
management with a specialized professional management agent with
knowledge of how to plan for new developments and maintain
existing ones, and how to deal with the complex legal, social and
economic relationships between landlords and tenants. Also, the size
and complexities of office and apartment complexes and retail centers
require intensive servicing, with large numbers of workers and
technicians, and proper amounts of materials and equipment on hand
or readily available.
An effective property manager will help the owner generate the
greatest possible net income over the period of time the owner expects
to own the property, whether such income is in the form of net rental
income, capital gains upon resale of the property, or tax savings.
Properties requiring specialized management skills include office
buildings, retail buildings, shopping centers, apartment houses,
condominium projects, single-family homes, lofts, factories, garages,
hotels, public buildings, industrial parks, mobile home parks, mini-
warehouses, parking lots, and marinas and their installations.
Residential Property – Landlord Tenant Code
A property manager managing residential properties is subject to the
Residential Landlord-Tenant Code (HRS Chapter 521), governing the
legal rights and responsibilities of landlords and tenants in residential
real estate. While neither the Real Estate Commission nor any other
state agency administers this law, a tenant whose rights have been
violated, does have easy access to legal recourse in court.
The law describes the rights, responsibilities, duties and legal remedies
of both the property owner and the tenant and sets minimum
requirements for residential tenancy agreements. A property manager
must be familiar with the provisions of this law and know how they
apply to the management of residential dwelling units for his clients.
Failure to fully comply with the law and to use the required procedures
for serving notices and for evicting tenants may subject the landlord to
forfeiture of various rights as well as damages.
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This law does not apply to industrial and commercial real estate rental
agreements (e.g., mini-warehouse, office and industrial site leasing).
This law does apply to cooperative apartments and residential
condominium units. While condominium and cooperative units may
be offered for rent by the owner subject to rules and bylaws adopted
by the trustees or board of directors of a cooperative, or by the
directors of a condominium owner’s association, they are generally
occupied by their owners.
In both types of ownership, the occupant of the apartment remains
responsible for maintenance and repair of the interior of the residential
unit, while the exterior and all common areas and facilities are the
responsibility of the owners as a whole. The cost of all common
maintenance activities and taxes is funded by pro rata assessment of
the occupants. Management and maintenance of the property is
essentially the same as for an apartment offered for lease, except for
advertising and negotiating for tenants.
The owners may elect to perform the necessary planning, budgeting,
hiring, supervision and accounting functions through their
organization. But, most larger complexes have found that
maintenance is more efficiently performed and relationships with
occupants are more harmonious when management is provided by a
professional property manager. Therefore, many licensed property
management firms offer management contract services to cooperative
and condominium owners.
Because condominium and cooperative owner-residents are assessed
monthly to pay their proportionate part of the annual expense
budget, they will react strongly to any mid-year surprise increases.
Therefore, the property manager must develop accurate operating
plans and budgets for the property owners and have them carefully
examined and approved by the owners’ governing body. The plans
and budgets must provide for normally anticipated expenses, as well
as for unforeseen emergencies. Plans should be projected for several
years in anticipating major repair projects, such as new roofs, exterior
painting, and driveway repairs or replacement. The manager’s
operating budget will pertain only to those items for which the
condominium or cooperative association is responsible, e.g., insurance,
grounds, building exterior, reserves for replacing the roof and
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mechanical systems, etc. The budget would not include expenses
pertaining to the interior of the owners’ units, e.g., painting,
replacement of refrigerators and stoves, etc. Also, because the
expenses would be paid from assessments against all the units in the
complex, there is no need to include a vacancy allowance in the
budget.
Many new condominium projects will have a large number of units
leased rather than owner-occupied when sales are moving slowly and
the developer offers units for rent in order to generate revenue to offset
development costs and debt service, or when investors purchase or
option units in the pre-construction stage or in the initial sales stage
when prices are comparatively low. A large number of rental units can
create special problems for the condominium owner’s association and
the property manager.
Tenants may not care for their units in the same manner as owner-
occupants would. They may demand special management services
and interior-unit maintenance normally expected from an apartment
manager. And when units are offered for rent by the owners or various
real estate brokers, the advertising and showing of the units may
irritate the residents and create breaches of the building’s security.
Many of these problems can be minimized if all rental units are
handled by one broker who is also the manager or who will cooperate
with the manager.
HAR Standard Rental Agreement
Note: This section relates to the Hawaii Association of Realtors® Rental
Agreement (RR301), Property Condition Form (RR302), Suggested
Checklist for Vacating Tenants (RR304) and Security Deposit Statement
(RR403), which are reprinted at the end of the chapter. Download these
forms for reference to accompany the discussion below.
Under HRS Chapter 521, Hawaii Residential Landlord-Tenant Code (the
Code) residential rental agreements between landlords and tenants
could be written or oral. A written agreement may be for any length of
time – month-to-month, six months, one year or any other term. When
the agreement is written, all promises and house rules should be
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included in the agreement, and any new agreements or changes to
the existing agreement should be put into writing and signed by both
parties. Furthermore, when a rental agreement is in writing, the
landlord must furnish a copy to the tenant.
An oral agreement, though not recommended, will normally create a
month-to-month tenancy or a tenancy for a fixed term of no more
than one year in duration. A lease for more than one year must be in
writing to be enforceable. Whether written or oral, all details of the
agreement should be clearly spelled out.
The Hawaii Association of Realtors® has developed a residential rental
agreement that may be used by Realtors® or any other persons who
wish to purchase it. Its use is not required by the Real Estate
Commission. However, because it has been carefully crafted and
reviewed, it does comply with all applicable laws and serves to
reasonably protect the interests of the landlord and the tenant.
A rental agreement needs to detail all terms of the agreement. This
includes the following:
• The exact property being rented and to whom the property will be
rented
• When the tenancy begins and ends, or if not for a fixed term,
what is necessary to cause it to end
• The amount of rent; how, where, by when and to whom the rent is
to be paid; and the penalty for late rent or returned checks
• The amount of any fees and/or deposits to be held by the
landlord
• Any services for which the tenant must pay, in addition to the rent
• Any special provisions for individual tenants
• Any exchange of services that will affect the amount of rent, such
as yard work for reduced rent
These and other items unique to the agreement with the particular
tenant are inserted in the blanks provided on the first two pages of this
agreement.
However, the four-page agreement includes a number of terms and
provisions that spell out rights, duties and remedies of the parties.
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Term Of Tenancy
A key section of the form deals with the term of the tenancy. The two
most common tenancies are fixed term (or estate for years) and
month-to-month (or periodic tenancy). However, others are possible,
including week-to-week tenancies, so the form provides room for
specifying other lease periods.
With a fixed term rental, rent cannot be increased before the end of
the rental period. Furthermore, the landlord has no right to terminate
the agreement during the rental period unless the tenant fails to pay
rent or fails to comply with the terms of the rental agreement. For a
fixed term rental, a termination date must be stated in the agreement,
and on that date, termination would be automatic without any
requirement that the landlord provide any advance notice.
However, if the landlord and the tenant do not communicate with
each other, to inform the other of their intentions, problems would
likely arise. A landlord who expects the tenant to renew the lease and
stay, would not take any action to rent out the unit, and is sorely
disappointed when he discovers that the tenant has moved out at the
end of the lease term. A landlord who expects the tenant to be
moving, would lease the unit to another tenant, and be in an
uncomfortable situation when he finds that the tenant has stayed.
A tenant who remains in a unit after the termination date without the
landlord’s consent, would become a holdover tenant, and have a
tenancy at sufferance. Under the provisions of the Code, a holdover
tenant would be liable for a sum of up to twice the monthly rent under
the expired agreement, calculated on a daily basis for each day he
remains in the unit and could be evicted any time during the first 60
days of the holdover tenancy.
Standard Term C (5) establishes that the tenant will be treated as a
holdover tenant if he fails to return the keys to the unit, complete all
repairs, remove his personal items and clean the unit. If the landlord
does not sue or enter into a new rental agreement with a holdover
tenant during the first 60 days of the holdover, the tenant will be
treated as a month-to-month tenant and pay the monthly rent
specified in this rental agreement.
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To avoid these problems, the parties can agree, at the time of entering
the rental agreement, to a rental extension. This converts the fixed
rental agreement to a month-to-month tenancy, at the same terms
and rental amount, unless the landlord gives the tenant a written
termination notice 30 days prior to the end of the lease term.
Standard Term H protects military tenants by allowing such a tenant
to terminate a lease with 30 days advance written notice from the
date of the next rent payment is due and a copy of military orders
requiring a change of residence to a place off the island for 90 days or
more.
Security Deposit
Section 5 of the form deals with the amount of the security deposit.
The Code limits the amount of all deposits to no more than one
month’s rent. This includes the security deposit and any deposits for
keys, pets, or anything else. Therefore, the most the tenant can be
required to pay is the security deposit and the first month’s rent.
The security deposit may not be used by the tenant as last month’s
rent. Therefore, the tenant cannot refuse to pay rent the last month of
his lease and demand that the landlord use the deposit as the rent.
Only the landlord, not the tenant, can decide whether he will apply
the security deposit to cover unpaid rent. The tenant may not use the
deposit as payment for the last month’s rent unless the landlord
agrees with the tenant in writing to such a use, and the tenant gives 45
days notice prior to vacating the premises. In any event, the landlord
retains the right to have the tenant pay for damages caused by the
tenant.
If any interest is earned on the deposit, it may be paid to whoever is
cited in the agreement. The Code does not require that the tenant be
paid interest on the deposit.
As specified in the Code, a security deposit is money given by the
tenant to the landlord for the following purposes:
• Remedy tenant defaults for:
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o accidental or intentional damages resulting from failure to
maintain the dwelling unit and all facilities, appliances,
furniture, and furnishings supplied by the landlord in fit
condition, reasonable wear and tear (deterioration or
depreciation in value by ordinary and reasonable use)
excepted;
o failure to pay rent due; or
o failure to return all keys furnished by the landlord at the
termination of the rental agreement.
• Clean the dwelling unit or have it cleaned at the termination of
the rental agreement so as to place the dwelling unit in the same
condition as it was in when the tenant entered into possession.
• Compensate for damages caused by the tenant, if he wrongfully
quits the dwelling unit.
In order to retain any portion of a security deposit, the landlord must
give written notice of the reasons to the tenant. All costs, such as
cleaning or specific repairs, must be itemized and copies of receipts
included. If the repairs cannot be accomplished within 14 days,
estimates for the cleaning or repair services may be substituted.
The Hawaii Association of Realtors® has developed a Security Deposit
Statement for use by landlords to comply with these requirements.
The form shows all deposits held by the landlord, and all charges the
landlord is claiming, itemized for such items as cleaning, pest control
services, repairs and replacements, unpaid rent, uncollected late
charges and uncollected interest, with a balance claimed by the
landlord or due the tenant.
This or a similar notice, along with any portion of the security deposit
remaining, after deductions, must be given to the tenant within 14
days after the termination of the rental agreement. In order to comply
with this 14-day requirement, the landlord may mail the material to
the tenant on or before the fourteenth day. The landlord should
obtain acceptable proof of mailing from the Post Office. He may also
prove compliance with the 14-day requirement by other types of
evidence, such as the tenant’s acknowledgment or the testimony of a
witness.
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If the landlord fails to serve notice and return any remaining security
deposit within 14 days, he must return all of the security deposit to the
tenant.
These requirements are laid out in Standard Term E (3) of the Rental
Agreement form. It provides the landlord will return the security
deposit within the 14 days after termination of the agreement, with a
written statement explaining any deductions. Deductions can be
taken for the following reasons:
• To repair or replace damaged or missing items • To pay any amounts due • change locks and replace keys and cards not returned by the
tenant • To clean and place all items and the unit in the condition they
had been in at the start of the rental period • To pay damages caused by the tenant leaving wrongfully, such
as by abandoning the unit before the end of the rental period or
without proper notice
The tenant is also liable for any damages and costs in excess of the
deposit amount.
In order to limit disputes over the landlord’s right to claim any part of
the security deposit, the Code requires that the landlord provide a
written inventory describing the condition of the premises and any
furnishings and appliances, prior to occupancy, and give a copy to the
tenant. Such an inventory should be precise, noting the cleanliness of
each portion of the unit and all details, no matter how minor, of the
actual condition. If a landlord does not make the written inventory,
the condition at the end of the tenancy will be presumed to be the
same as at the start, unless the landlord can prove otherwise.
Standard Term D deals with this inventory requirement. It provides that
the landlord will inspect and inventory the unit prior to the tenant
move-in, and give the tenant a written inventory form which will serve
as an agreement between the parties as to the condition of the items
and the unit at the time of move-in. The Hawaii Association of
Realtors®’ Property Condition Form (RR302) can be used for this
purpose. It provides for the tenant to review and comment on the
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management’s description of the premises within seven days or accept
the condition as noted.
The same standard term requires that at the end of the tenancy the
tenant is to remove all of his personal items, pay for storage or
disposal of any items left behind, have the unit in clean and proper
condition on the day the tenancy ends with all the same items in the
unit that had been there when he moved in, and in the same
condition, except for normal wear and tear, as they were in when he
moved in.
Neither the rental agreement nor the Code requires a final inspection.
However, an inspection is the best way to prevent disputes. The Hawaii
Association of Realtors® has developed a Suggested Checklist for
Vacating Tenants (RR304), to be used by landlords upon receipt of a
notice from the tenant that he does intend to vacate.
This form is used to confirm the tenant’s intent to vacate his unit, and
to clarify the tenant’s duties when he does vacate. Generally, for a
tenant to obtain a full refund of the deposit he would need to repair
all damages he caused to the unit during the tenancy, including holes
put into walls for hanging pictures, thoroughly clean the unit, and
return all keys on the termination date. As stated on this form, the
tenant’s duties include the following:
• Cooperate when the landlord shows the unit to prospective
tenants
• Pay the rent due
• Complete all cleaning and repairs before the move out inspection
• Return all keys and cards
• Terminate utility services
• Notify the postal service of the change of address
It also advises that the tenant can be present during the final
inspection and contains suggestions for cleaning the unit that the
tenant can use to assure he receives as great a deposit refund as
possible.
After an inspection of the premises, the landlord is not required to give
the tenant a second chance to correct conditions found unsatisfactory,
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as the rental agreement requires that the unit be in the proper
condition on the day the tenancy ends. Therefore, the tenant should
have everything in order prior to the inspection. In practice, many
landlords will give tenants a second chance, if it will enable the work to
be completed sooner than if the landlord had the conditions corrected.
Also, if an inspection were made prior to the termination date, a
tenant would have an opportunity to make any corrections required
by that date.
In addition to these terms, the agreement provides for certain landlord
and tenant rights and remedies.
Landlord Rights
A contract for money or property, such as a lease, would be assignable
unless there is a specific provision restricting assignment. This
agreement does have a restriction that allows the landlord to prohibit
any change in tenants. A certain section of the agreement prohibits
adding any tenants (so two screened tenants do not become six
unscreened tenants), subleasing (transferring some, but not all, of the
tenant rights to others), or assigning (transferring all rights to others)
without the landlord’s consent.
Standard Term C (4) of the Rental Agreement gives the landlord the
right to consider the unit abandoned if the tenant is absent for more
than 20 days without written notice and has not paid rent for that
period. If upon moving out, the tenant leaves personal property
behind that the landlord determines has no value, the landlord may
throw it away. If the landlord determines the property has value, he
must first store it, at the tenant’s expense, and then sell it in a
commercially responsible manner or donate it to a charitable
organization, after mailing notice to the tenant at his forwarding or
last known address. The landlord must hold the property for 15 days
before advertising it for sale or donating it to a charity. If he sells it, he
must hold the proceeds, less any accrued rent and costs of storage
and sale, in trust for 30 days. After that he may claim the proceeds as
forfeited.
Standard Term E (2) gives the landlord the right to enter the unit, with
at least a two-day notice, in order to inspect it, make repairs, decorate,
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supply agreed services, or show the property to a prospective buyer,
lender or purchaser. Entry must be at reasonable hours, and the
landlord cannot abuse his right or use it to harass the tenant. The
tenant cannot unreasonably withhold his consent to entry.
Standard Term E (5) provides the landlord with the right to serve
notices on any occupant of the unit. Notice served on one tenant is
notice to all tenants. If notice cannot be delivered to the tenant, it can
be posted on the unit.
Standard term F gives the landlord the right to provide the tenant’s
rental history to other landlords.
Landlord Responsibilities
One of the landlord’s responsibilities is to comply with the state
statute prohibiting discrimination in housing. This agreement notifies
the tenant that the landlord will not discriminate due to race, sex
(including gender identity or expression), sexual orientation, color,
religion, marital status, familial status, ancestry, disability, age or
human immunodeficiency virus infection.
The Code requires that the landlord issue receipts for all rents paid.
Although the Code allows that canceled checks may constitute
receipts, the tenant may request a landlord’s written receipt in
addition to the canceled checks. This agreement covers the
requirement by specifying that the landlord will provide receipts for
rent paid in cash, and if requested, for rent paid by check.
In Standard Term E(1) the landlord agrees to have the unit ready and
available for the tenant on the date of occupancy and maintain all
services he supplied to the tenant. However, he has no liability for
service or appliance interruption beyond his control, and the tenant
cannot use a service interruption as a basis for termination of the
agreement.
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Tenant Rights
A very key element of this Rental Agreement is Standard Term I(4),
which advises the parties to check the Code to learn of their complete
rights, duties and remedies. This rental agreement does not detail all
of the tenant’s rights or landlord’s obligations. Even though they are
not specified, certain rights established by law may not be waived or
modified by either party, even if the parties wish to do so.
Tenant Responsibilities
The agreement makes each tenant who signs the form jointly and
severally liable for the payment of the rent and for all other tenants
and guests acting in compliance with the terms of the agreement.
Therefore, if there are three persons sharing an apartment, each one is
responsible for all of the rent, not only one-third of the rent, if the
other co-tenants move out.
Standard Terms B and C spell out tenant duties and landlord remedies
if the tenant breaches the agreement. The tenant must:
• comply with all rules.
• not disturb others
• not alter or even put holes in the unit without written consent of
the landlord. He can make modifications to accommodate a
disability, after obtaining the landlord’s consent, but will need to
return the unit to its original condition upon termination of the
rental agreement.
• bear full responsibility for loss or damage to his belongings, so he
should maintain insurance covering his belongings.
• maintain and properly operate all appliances and fixtures.
• provide advance notice of any absence of five or more days.
• provide notice of defects the tenant is not responsible for fixing.
• not have pets occupy or visit unless he has prior written approval
(approval is granted for assistance animals).
• use the premises for legal residential use only.
The landlord may terminate the agreement immediately if the tenant
uses the unit illegally or causes or threatens to cause injury to any
person. He may terminate it after giving notice, if the tenant fails to
186
either pay rent or comply with any of the terms of the agreement. The
notice for unpaid rent must allow no fewer than five business days to
pay, and the notice or violation of the agreement must allow no fewer
than ten business days to correct a violation of rules or repair damage.
Disclosures are provided in a section of the form in Standard Terms
section I:
1. Lead Based Pain Disclosure: If the unit was constructed before
1978, a Lead Based Paint Disclosure must be provided to the
tenant.
2. Asbestos Disclosure: This section warns of the possible presence of
asbestos in older units.
3. Mold Disclosure: Tenants are made aware that mold may be
present in the unit.
4. Hawaii Residential Landlord Tenant Code: Both the landlord and
the tenant should be aware of the provisions of the Code which
can be found in Chapter 521 of the Hawaii Revised Statutes.
5. Conflict with the Landlord Tenant Code and Other Laws: If the
agreement is in conflict with the Code or other laws, then the
Code and other laws prevail over the agreement.
6. Sex Offender Registration (“Megan’s Law”): Neither the Landlord,
Owner, Agent, or Brokerage Firm is required to obtain information
regarding sex offenders.
Sections 10 and 11 of the form provides checkboxes for items such as
the Lead Based Paint Disclosure, and addenda that have been
provided to the tenant.
Commercial Property Management
There is also a large management market for commercial properties,
i.e., retail buildings, office buildings and complexes, and industrial
properties. Each category of commercial property comes with its own
management problems and challenges, requiring that the property
manager be an effective business analyst, planner, organizer and
administrator.
Retail Properties
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In a retail facility, goods are sold in small quantities directly to the user
or consumer. Most typically, suburban retail developments provide for
a mix of large department stores offering a wide variety of goods and
smaller, specialty stores offering a narrow range of goods, in an
attractive, weather-protected complex, with ample parking.
The major management opportunities lie in shopping centers, where
major tenants remain for long periods of time and smaller, specialty
shop tenants may move in and out as moved by the economic tides
and their business success or failure. The manager of a shopping
center is responsible for maintaining a continuing professional
marketing program to attract tenants and maximize revenues, and for
directing an efficient maintenance service for the extensive common
areas and parking facilities.
Classifications
Shopping and retail centers are normally classified by several factors,
including size, layout, type of stores and trade area. Below are several
of the more common classifications:
• A strip center is normally small in size, consisting of just a few
stores laid out in a straight line or an L or U shape. The typical
anchor for a strip center is a convenience store. The trade area is
generally the immediate neighborhood. The center is normally
designed to provide quick and accessible shopping for limited
products, with a focus on location and community convenience.
• A specialty center is usually small in size – up to about 100,000
square feet. It usually lacks an anchor tenant and contains very
unique or specialty boutiques. It may also contain one or more
restaurants and may be located near high-income or major
tourist attraction centers.
• A neighborhood center is typically somewhere between about
25,000 to 125,000 square feet. It generally contains 15 to 20 stores
with one anchor tenant, such as a supermarket or a discount
store. It is supported by about 1,000 families in a trade area of up
to two miles from the center. Such small, neighborhood retail
buildings seldom require continuing professional property
management, although brokers are often hired to secure a tenant
or a buyer.
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• A community center may have from approximately 125,000 to
300,000 square feet of space. It will normally contain 20 to 70
stores and two or more anchor tenants, such as smaller
department stores, home improvement stores or variety stores. It
is supported by about 5,000 families within a trade area
extending out to around three miles.
• A regional center increases in size to 1,000,000 or more square feet
of space. In most cases, it will contain several large anchor stores
and an assortment of other businesses, such as apparel, jewelry
stores, and often a food court. It will have several
major department stores, restaurants and banks among its 70 to
225 stores. Depending on its size, it may require 50,000 to 150,000
families for support, within a trade area extending 10-15 miles.
Leases
Lease terms for retail property may be gross, net or percentage:
• A gross lease provides for payment of a fixed rate, with the
landlord paying taxes, insurance and other operational expenses.
Responsible for repairs is either the landlord or the tenant, based
on the terms of the rental agreement.
• A net lease provides for payment of a fixed rate, generally with
scheduled annual increases, and with the tenant paying taxes,
insurance, and maintenance. Besides “net” items, there may be
additional charges for maintenance of common areas. Common
areas are parts of the property shared by the tenants, such as
parking facilities, walkways, landscaping, administration, and
security. The charges for maintenance of these areas are known
as common area maintenance (CAM) charges. CAM charges are
prorated based on how many square feet of the total the tenant
occupies. With such a lease, the owner and manager are able to
avoid much of the burden of management but do need to
conduct regular inspections to ensure that the tenant is
performing the required maintenance, and not deferring it to
increase his profit. The net lease may permit the tenant to
sublease part or all of the property for additional profit.
• A percentage lease is the most common type of lease used in
retail centers. This lease provides for the rent to be a percentage
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of the tenant’s gross sales. The percentage rent clause will state
which sales items are part of the gross sales calculation. Excluded
sales items can include sales tax, refunds, and returns. The lease
provisions will also direct the tenant on how and when to submit
gross sales figures for percentage rent calculation. The lease will
often provide the landlord with the right to examine the tenant’s
financial records to verify reports of income, the right to
determine days and hours of operation, and the right to
terminate the lease if revenues fall below a target figure. It may
also allow the tenant to terminate the lease if gross sales
objectives are not met.
There are three common types of percentage leases:
• In a percent-only lease, the rent amount is directly tied to sales,
without any base or minimum rent. The drawback for the landlord
to this form of lease is the impact when the business does poorly. • A variable scale lease also does not contain a base rent. However,
the actual percentage of sales to be paid as rent may increase or
decrease based on various conditions. This type of lease is often
found in rehab phases of turnaround properties or in
distressed/problem properties. • With the minimum percentage lease, a negotiated minimum rent
level is established. Overage rent, a percentage of sales over a
base amount, provides the owner with additional cash flow and
serves as a hedge against inflation. The percentage clause for
overage rent generally contains a ceiling or maximum rent. A
retail lease generally will have a minimum rent (a breakpoint),
established on a per square foot basis, a percentage of gross
sales charge, and an allocation of “pass through” items. The lease
provides for payments of rent to be the greater of the minimum or
the percentage rent calculation. This type of lease is typically
found with larger, anchor tenants with bargaining leverage.
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Marketing - The marketing of retail space is challenging. Critical
components of successful marketing of retail spaces include the
following:
• Tenant mix. Tenant mix in retail centers needs to be balanced. A
good tenant mix consists of a variety of stores that work well
together to enhance the performance of the overall center and
each individual store. This helps to create the three most
important aspects of concern to property and retail storeowners –
traffic, traffic and more traffic. When determining the mix, the
property manager should look at the location, competition and
the customer base. For example, in a large regional mall
anchored by department stores, complementary tenants would
include apparel, jewelry, shoes, and so forth.
• Tenant selection. This is normally more critical than when
selecting residential tenants because leases tend to be longer
and the amount of rental money is much larger. A mistake here
can be very expensive. In addition, boarded up stores that have
gone out of business damage the center’s goodwill and image.
Some of the more important considerations for tenant selection
include the following:
o Major versus smaller tenants
o High status tenants
o Space planning
o Retention of existing tenants
o Competition
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Office Buildings
Tenant mix and selection are also critical to the success of office
buildings. Tenant selection includes many of the concerns that apply
to retail properties. The success or the failure of the building is based
on solid tenant selection. Attracting the right tenants is part of the
marketing challenge of commercial property. A successful reputation
is the best marketing tool.
An office building is generally defined as a property that provides
space to tenants engaged in providing services rather than goods
(retail space) or manufacturing (industrial buildings). In urban areas,
multi-story office buildings challenge the management skills of the
most expert property managers. In suburban settings, development of
office space has typically been in the nature of office park complexes
and two and three-story small office buildings dispersed in
neighborhood commercial centers and along major arterial streets
and highways. These smaller properties offer opportunities for
property managers familiar with local conditions.
Ranking
Office buildings are generally ranked in categories of desirability. The
main categories are:
To achieve these ratings or grades, a combination of the following 12
ranking criteria is used:
1. Location
2. Neighborhood
3. Access to transportation
4. Prestige of building
5. Appearance
6. Lobby
7. Elevators
8. Corridors
9. Office interiors
10. Management
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11. Tenant mix
12. Tenant services
These factors help place the property into the correct category. For
example, location is based more on prestige than geographic area,
while tenant mix includes the reputation of the tenants and the
compatibility of their services. Each of these factors relates to the
desirability of a specific building. It explains why an office building
with high rents is full, while the building down the street with bargain
basement rents is half empty. The higher the grade, the more
prestigious the property, thus creating higher demand and, of course,
higher rent levels.
Office leases normally run for longer than one year and include an
escalation clause in the rental rate to permit future increases that
reflect the landlord’s increases in taxes or other expenses.
Measurements
Office space is normally leased at an annual rate per square foot of
usable space or rentable area. Therefore, it is important for the
landlord and tenant to have a clear understanding of the following
terms used in building measurement:
• The gross area of the entire building is the total sum of all of the
area within the outside faces of the exterior walls.
• The gross rentable area includes all areas within the outside walls
except pipe shafts, vertical ducts, elevator shafts, balconies and
stairwells.
• The net rentable area is the gross rentable area less public
corridors, bathrooms, janitorial, storage or electrical closets and
any other area not available to the tenants.
• The usable area is the area on any floor that can be actually used
by the tenant.
To summarize:
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Gross area of the entire building
- shafts, ducts, balconies, stairs, etc.
= rentable area
- public corridors, restrooms, mechanical rooms, etc.
= usable area
The most common approach to measuring usable space on a single-
tenancy floor is to measure to the inside finish of the permanent outer
walls of the building, then deduct for stairs, elevator shafts, flues,
pipes, ducts and other utilities and support areas (but not for
structures that support the building).
For a multiple-tenancy floor, the total net rentable area for the floor is
calculated by measuring the space in each office from the inside finish
of the outer walls, corridors and permanent partitions between
adjoining office space and adding the individual rentable office areas.
Common areas, such as washrooms, lobbies and hallways are
allocated to each office pro rata according to its rentable floor space.
In setting the rent level, the property manager will take into
consideration the 12 ranking points, general economic conditions and
the owner’s desired profit margin. To do this, most managers will use a
break-even analysis to determine the minimum rent needed.
Break-even analysis takes into consideration the costs of maintaining
and operating the building, as well as the owner’s expected return on
investment. The break-even rent is calculated as follows:
Expenses + debt + return
÷ Rentable area of building in square feet
= Rent per square foot
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Income for office buildings is often classified as:
• rental income.
• service income.
• miscellaneous income.
Expenses are classified as:
• operational expenses.
• alterations, painting and decorating.
• fixed charges (e.g., insurance, taxes, and depreciation).
• financial expenses (e.g., corporate fees, organization expense,
and interest on debt).
A management plan for an office building is generally more
comprehensive and sophisticated than for an apartment building. The
market analysis for an office building may need to consider the entire
region, city or town, as well as the neighborhood in which the property
is situated, and include a detailed breakdown of the characteristics of
competitive office buildings. A property analysis of the subject
building should include its physical characteristics, financial situation,
and present operating policies, procedures, and personnel. The
manager can develop a management plan and a financial projection
only after study of all relevant facts developed by research.
Industrial Property
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Industrial property includes all land and buildings involved in the
production, storage and distribution of goods and products. It may be
single tenant, multi-tenant or general industrial parks. While many
large manufacturing or distributing firms prefer to build and own their
manufacturing, processing or storage facilities, others elect to enter
into long-term leases for property in order to avoid tying up their
capital in real estate. Industrial buildings may be suitable for general-
purpose use, or for a limited number of special purposes, or even for a
single purpose. The more limited-use buildings may be constructed by
the user, then sold to an investor and leased back for a long period,
extending at times through the anticipated useful life of the structure.
Most industrial properties have little need for continuing, on-site
management. More often brokers will play a useful role in helping
manufacturers find properties for new plants or distribution facilities
and in negotiating leases. Modern warehouse complexes with business
offices included provide flexible shipping and distributing facilities
available on relatively short-term leases and are appropriate for
professional management. Industrial property managers tend to
specialize in certain aspects of the sales, leasing and management of
industrial properties, and offer a valuable service in lease-up of new
industrial complexes, where advertising and tenant qualification are
particularly critical functions.
Over time the trend has moved toward industrial sites becoming more
oriented towards the storage and distribution of goods and locating
close to the labor source. While a gross lease may be found on occa-
sion with older properties, the typical lease for industrial park property
is a triple net lease. Therefore, once the industrial park is leased up, it is
easy to manage, resulting in fees lower than for other types of
property.
Research & Development Buildings
These are an offshoot of the industrial building and are rapidly
growing in popularity. These buildings tend to be located near major
education institutions and often employ highly skilled and educated
individuals. These buildings usually contain high tech environmental
controls along with advanced safety and security systems.
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Rental rates for these structures are typically higher than for industrial
structures, but slightly lower than for offices. Management fees are
normally based on a fixed amount per square foot or in some cases on
a percentage of the effective gross rents.
Mini-Storage Facilities
These facilities are a rapidly growing phenomenon nationwide. As the
size of homes and apartments has decreased, these properties are
filling an important void. They typically consist of long, narrow
buildings facing each other across driveways. The typical tenant mix
for mini-storage complexes is 70% residential and 30% commercial. The
property manager’s main responsibility is marketing, followed closely
by security and safety of the stored belongings.