From the desk:Self-Storage (Passive Hold)

Third-party management contract on a 480-unit facility, the fee stack doesn't add up

Owner group asked me to review a management agreement before they sign. 480 units, roughly 52,000 net rentable square feet, small metro on the edge of a bigger one. Occupancy 86 percent physical, and the rent roll shows street rates about 14 percent above in-place, which tells me they haven't pushed existing tenant rate increases in a while.

The fee stack in the contract: 6 percent of gross revenue, $3,500 monthly minimum, plus a call center charge billed separately at about $1.90 per unit per month, plus a platform/marketing charge of 1 percent of revenue, plus tenant insurance commission split 50/50 which the operator books as their own line and doesn't credit to the property.

On my numbers that's closer to 8.5 percent effective before you count the insurance commission, and the insurance program on 480 units at 60 percent penetration is real money. Call it $11 per policy per month gross, half to the manager. That's another $1,500 a month leaving the property.

What I can't work out is whether that's normal for this size or whether the owners are getting sanded. Everyone tells me 6 percent is the market number, but nobody quotes the number with the add-ons in it. The other thing bothering me is the existing-tenant rate increase policy. The contract says increases are at the manager's discretion consistent with their standard program, and I've asked twice for what that program actually is in writing without getting an answer.

Decision in front of me: recommend they sign with a fee cap and a written ECRI schedule attached as an exhibit, or tell them to go back out to two more managers and lose about 60 days. They want to close in three weeks.

Answer

3joe_delgado5AP4CPRO6

I'd sign with the cap and the exhibit, and I'd spend the three weeks on two specific things instead of re-bidding.

First, the effective fee. Get it stated as a single all-in percentage of gross revenue with a schedule of what's included. If they won't do all-in, cap the add-ons in aggregate at a fixed percent so the platform charge can't grow. 8.5 percent effective on a 480-unit facility in a secondary metro isn't wildly out of line, but you should be paying it knowingly rather than discovering it in month seven.

Second, the insurance commission. @thicket is right that this is the fight. Ask for it to flow through the property P&L with the manager's share shown as an expense line. Same net dollars to them, completely different NOI presentation, and it means the number you take to a lender or a buyer is the real one. Most managers push back and some will trade it against fee.

On ECRI, a written schedule as an exhibit with a discretion carve-out is achievable. Something like increases considered at month 7 and annually thereafter, target band stated, manager may defer with written notice and reason. That gives them room and gives you a record when they don't do it.

The thing I'd actually watch: with home sales as slow as they are, relocation-driven move-ins are thin in a lot of markets. If your move-in volume is already soft, an aggressive ECRI program on existing tenants raises move-out risk against a weak replacement pipeline. So the exhibit should be a schedule you can dial, not a mandate. Get the term and the termination notice too, @anchor is asking the right thing.

6 replies

1brandonlee36Passive

The insurance split is the part I'd fight over, not the 6 percent. On my small multifamily nothing works like this, but I've read enough storage operating statements to know the tenant insurance line is where the margin hides. 60 percent penetration on 480 units is real, and if it isn't credited to the property then your cap rate math on exit is being done on an NOI that's missing a line item a buyer would otherwise underwrite. Ask them what happens to that revenue in a sale.

0karen_whitfieldPG4APRO7

You said street rates are 14 percent above in-place. That gap is the whole deal, and it's also the reason the manager won't put the ECRI program in writing. If they commit to a schedule and the market softens, they own the vacancy. If they keep it discretionary they get to move slowly and blame the housing market. Both of those are honest positions, they just aren't the same position. I'd want the exhibit.

2gregpowell66AG4BPRO8

60 days to re-bid isn't nothing but it's cheaper than a three-year contract with a discretionary clause in it.

1ehernandez74PO2BPRO5

Question rather than an answer. Is there a termination provision, and what's the notice period? I've been reading these for a while as prep and the fee stack matters less to me than how fast you can leave. A 90-day without-cause termination makes the 8.5 percent survivable because you can benchmark against another manager in year two and actually act on it. A three-year term with cause-only termination and a liquidated damages number turns every one of those add-on fees into a fixed cost you cannot argue with. @trellis did you get the term and the exit language?

0tashaford30PB2APRO7

Following this because I'd assumed self-storage management was simpler than apartments and this reads like it's worse. The call center charge per unit per month is a line I'd never have thought to look for.