Happening NowSelf-Storage (Passive Hold)

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

Reviewing a management agreement before an owner group signs is worth doing line by line. Facility profile: 480 units, roughly 52,000 net rentable square feet, small metro on the edge of a bigger one. Occupancy 86 percent physical, with the rent roll showing street rates about 14 percent above in-place, a sign existing tenant rate increases have not been pushed in a while. The fee stack in a contract like this often reads: 6 percent of gross revenue, a 3,500 dollar monthly minimum, a call center charge billed separately at about 1.90 dollars per unit per month, a platform and marketing charge of 1 percent of revenue, and a tenant insurance commission split 50/50 that the operator books as its own line rather than crediting to the property. The effective rate on those numbers lands closer to 8.5 percent before counting the insurance commission, and on 480 units at 60 percent penetration that commission is real money, roughly 11 dollars per policy per month gross, half to the manager, another 1,500 dollars a month leaving the property. Whether that is normal for this size or a sign the owners are being sanded is the real question. Everyone quotes 6 percent as the market number, and few quote it with the add-ons included. The existing-tenant rate increase language is the other flag worth pressing on: a contract that leaves increases to the manager's discretion consistent with their standard program, with that program never provided in writing after repeated requests, is a term that should be pinned down before signing, not after. The reasonable path is a fee cap and a written ECRI schedule attached as an exhibit rather than a rushed signature to hit a three-week close, even though going back out to more managers can cost sixty days.

tonyv88 PU4APRO 10

Answer

joe_delgado5ActivePRO

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. @brandonlee36 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, @ehernandez74 is asking the right thing.

joe_delgado5ActivePRO

6 replies

brandonlee36 SP1BPRO 15

The insurance split is the part worth fighting over, not the 6 percent. Storage operating statements consistently show the tenant insurance line is where the margin hides. 60 percent penetration on 480 units is real, and if it is not credited to the property, the cap rate math on exit is being done on an NOI missing a line item a buyer would otherwise underwrite. Ask what happens to that revenue in a sale.

brandonlee36 SP1BPRO 15

karen_whitfieldPassivePRO

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.

karen_whitfieldPassivePRO

gregpowell66 AC4BPRO 19

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

gregpowell66 AC4BPRO 19

ehernandez74 PC3BPRO 12

Question rather than an answer. Is there a termination provision, and what is the notice period? The fee stack matters less than how fast an owner can leave. A 90-day without-cause termination makes a 8.5 percent stack survivable, because the owner can benchmark against another manager in year two and 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 that cannot be argued with. @tonyv88 did you get the term and the exit language?

ehernandez74 PC3BPRO 12

tashaford30 SG2CPRO 16

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.

tashaford30 SG2CPRO 16

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