How Could Management Fees be Calculated?

Sometimes homeowners and board members see a bottom line number for management fees and wonder why costs are so high. Or they feel the a more modest solution will fit with their needs.

There is very often a large difference in quotations from property management firms.  There are varying reasons for this, top of this list would be staff salaries.  There will never be standardization in the industry for management fees.  What I have provided is a sample guideline that boards can refer to when comparing quotations for property management service.  It should also be used to caution boards when selecting the "lowest quote", as this example shows, the lowest quote can mean inexperienced staff. 

Calculation of management fees is very subjective and will vary greatly from company to company. Let’s look at one possibility for this calculation. We will attempt to calculate a possible management fee for a fictional 300 unit hi-rise corporation.

We have to make some assumptions about salaries to continue. 300 units requires a full time administrator, our imaginary administrator will make $35,000. Our fictional property manager will make $55,000. The table below shows the cost to the management firm for staffing a 300 unit hi-rise building with a full time property manager and full time administrator.

So, to recap: we have actual direct costs of $103,889 per year for direct property costs and we have yet to look at accounting and head office administration.

Ok, we have our staffing model, now let’s do the math. 72,917 divided by 300 units divided by 12 equals $20.25 per suite per month.

We must now consider the management companies costs to manage your property. The ratio of units to accounting team also varies greatly company to company. In my experience, on average, one senior accountant and 2 clerks (one accounts receivable clerk and one accounts payable clerk) can handle the volume of approximately 3,000 units. For our example, let’s assume that we have a fantastic team and they are pushing through 4,000 units of volume per month (we’ll worry about stress levels and employee turnover later).

We now have accounting costs of $175,835 per year to manage 4,000 suites. This works out to an average of $3.66 per door per month (175,835 divided by 4,000 divided by 12 months).

So to recap, we have direct costs of $20.25 per door and accounting costs of $3.66 per door, for a total so far of $23.91 per door. The last items we must consider are profit and overhead costs. A management company is a for-profit enterprise and must maintain a profit margin to remain viable.

Most for-profit corporation literature will tell you that a company’s overhead should be approximately 10% of its revenue. A management company will have various overhead costs it must factor into it’s fees. These will include insurance, rent, advertising, etc. The average consumer does not directly see this factor as it is built into the costs of the goods or services. For our illustration, we are “crunching the numbers” so that you can have a view of some of the factors involved in fee calculations. Let’s assume that if we follow the model above, then our total costs are $23.91 per door and 10% company overhead should be $2.39 per door. We will allocate 20% of the company’s revenue to profit and this works out to $4.78 per door.

We now have a total management fee of $31.08 per door per month or a total $111,888 per year in management fees for 300 units at reduced service levels.

A few truths about the model we’ve used. 4,000 unit portfolios for the head office accounting staff are unrealistic. This will lead to high volume of turnover for clerical staff and interruptions in the corporation’s continuity of accounting. In addition, firms that allocates a lower percentage for overhead and profit run the risk of not being economically viable over the long term.

Asking your property management firm to provide staff at reduced hours does not mean the work required for your corporation gets done elsewhere, it means it does not get done!