The institutional investor has found that income property must be placed under the supervision of professional, experienced and innovative managers. With more property moving into the ownership of institutions and real estate investment trusts, the need for asset managers increases.
Asset managers have become more important during the past decade for three major reasons:
- New classes of real estate owners (notably, pension funds and foreign investors) lack the “hands on” expertise of the individual owners and small ownership groups of former years.
- Corporations now have approximately 25% of their total assets in real estate, and are now emphasizing its importance for profits.
- Investing in real estate has become much more difficult than in previous years because of increased competition for tenants, difficulties in getting financing, and increased government regulation.
Most real estate professionals are unfamiliar with the functions of an asset manager (apart from realizing that the asset manager has a different job from the property manager).
The Asset Manager
The asset manager fills the leading role in the profitable management and performance of a real estate asset. This manager assumes a fiduciary relationship with the real estate owner and accepts the responsibility for managing the real estate asset so that it achieves the highest performance within the owner’s guidelines.
Example: An investor acquires a commercial property for $15 million, of which $6 million is paid in cash and the balance with an institutional loan. The investor’s goal is a 10% annual cash flow return ($600,000 per year) and a sale in the tenth year, at which point cash will be needed to pay off the balloon loan. The investor hires an asset manager to oversee these objectives. The asset manager’s focus will be on maximizing the economic return through the use of profit-enhancing techniques. These include:
- Balancing the loan/equity ratio in order to maximize leverage.
- Employing and coordinating professionals with expertise in particular aspects of operating this property.
- Minimizing liability exposure through appropriate lease provisions and insurance coverages.
- Gathering and applying information concerning the market.
- Constantly reviewing prospective buyers, since the maximum property value may be achieved some time before the tenth year.
Planning The Project
The roles of the asset manager’s are as follows:
- Supervise property management. The asset manager should supervise the overall operations of the property management company, i.e., define general management policies, monitor nonroutine decisions and transactions, and serve as a liaison between the property manager and the owner.
- Supervise leasing and marketing. The asset manager should review long-term leasing policies, monitor large or unusual transactions, and act as a liaison between the leasing firm and the owner.
- Manage cash flow. An essential and time-consuming role is to handle cash flow, the true measure of the economic success of the asset. Cash controls should be instituted and monitored.
- Report requirements and timing. Frequent reporting of pertinent information to the owner keeps him/her informed about the status of the property and makes necessary decisions easier.
- If the owner is a foreign investor, the asset manager may have the responsibility of preparing U.S. tax returns. For domestic investors, the asset manager’s role would be limited to providing the essential tax information to the owner’s accountant.
- The proper maintenance of the property is a major responsibility of the asset manager. This includes overseeing a maintenance program and managing a capital improvements program. In making voluntary capital improvements, the manager must be sure that the prospective return exceeds the cost of the capital needed for the improvement.
- Retain other professionals. Attorneys, accountants, appraisers, and mortgage brokers are just some of the professionals who frequently must be retained in the course of managing improved real estate. The asset manager often has the responsibility of choosing a professional, although the choice may need to be ratified by the owner.
- Contract adherence. Contractual relationships often exist in connection with income real estate. These include the asset management agreement itself, the property management agreement, service contracts relating to the real property, tenant leases, mortgages and deeds of trust, and possibly a partnership agreement among the property owners. With the exception of the partnership agreement, the asset manager will be involved with these agreements in some manner. The manager should be aware of critical terms and provisions that give the owner valuable rights (e.g., a renewal right) or that can result in default if not complied with.