Chapter 51
Managing the Physical Asset
INTRODUCTION
Managing the physical asset involves maintaining the property and, sometimes, managing new construction, renovation and rehabilitation activities. Often the property manager also is responsible for managing on-site maintenance and repair personnel and for contracting for maintenance and construction services. The modern property manager must also give serious attention to security and safety considerations to protect both the lives and property of tenants and the owner from financial loss.
THE OBJECTIVES OF MAINTENANCE
A comprehensive and properly managed maintenance program provides four major benefits to the owner of the property.
| (a) | TENANT SATISFACTION AND RETENTION – Doing the repair work requested by a tenant in a timely, appropriate, and clean manner increases the tenant’s satisfaction with the apartment or commercial space. Enhanced tenant satisfaction is an important element in the tenant’s lease renewal decision and can produce higher contract rents and lower vacancies. | |
| (b) | REDUCING OPERATING COSTS – A comprehensive preventive maintenance program can reduce total maintenance and repair costs and can also affect other operating costs such as utility expenses, property insurance premiums, and emergency repair costs. | |
| (c) | ENHANCING NET OPERATING INCOME – A comprehensive maintenance plan contributes to tenant satisfaction which increases tenant retention and reduces operating costs. The results are higher levels of net operating income and higher property value. | |
| (d) | DEFERRING FUNCTIONAL OBSOLESCENCE – Functional obsolescence is the value reduction caused by a mismatch in the desires of potential tenants and the physical attributes of the building. Proper maintenance of the building helps retain the physical attributes wanted by potential tenants and can lead to higher contract rents. Absorption of vacant space occurs sooner, thereby reducing vacancy levels and increasing the property’s effective gross income. |
These benefits of a comprehensive and conscientious maintenance program affect the cash flow and the value of the property leading to the financial success for the owners.
TYPES OF MAINTENANCE
Maintenance of the physical asset consists of five types of maintenance activity:
| (a) | CUSTODIAL MAINTENANCE – Custodial maintenance is the day-to-day housekeeping activity that makes the property presentable and acceptable to the existing and prospective tenants. In most cases, this will involve preventive maintenance measures as well. | |
| (b) | CORRECTIVE MAINTENANCE – Corrective maintenance is performing the repairs necessary to keep the building and its components, equipment, systems, and amenities functioning day to day as they were designed to do and as the existing tenants expect them to do. | |
| (c) | PREVENTIVE MAINTENANCE – Preventive maintenance involves regularly scheduled inspections of the structure and its mechanical equipment to identify potential problems before they arise. Preventive maintenance can avoid or postpone major repairs that interrupt service to the tenants and cost the owners money. Custodial and corrective maintenance are key factors in preventative maintenance. Preventive maintenance should be considered a key factor in preserving a structure and its mechanical equipment. | |
| (d) | EMERGENCY REPAIR – Emergency repair is corrective repair that needs immediate attention to reduce damage to the property and to protect the life and health of the tenants and others. | |
| (e) | DEFERRED MAINTENANCE – Deferred maintenance results from delaying corrective maintenance and repair to the future. The property manager can delay or defer some but not all corrective maintenance and repair. Broken water lines and non-functioning elevators require immediate corrective maintenance. Leaking faucets and squeaking circulating fans in the furnace require repair but it can be deferred for a short time. Worn floor coverings and poor insulation can be ignored for longer periods. Careful consideration should be taken when owners and property managers choose which items to defer. |
The effective property manager is aware of these five categories of maintenance and has a plan to address each of them. The property manager is also directly and indirectly involved in each of these maintenance actions.
CUSTODIAL MAINTENANCE
Custodial maintenance is the process of keeping the building and the grounds clean for the existing tenants, prospective tenants, and visitors to the property. In addition, the cleaning and housekeeping personnel should be alert for any potential problems needing corrective repair and should report them to the property manager or the maintenance supervisor. Custodial maintenance covers five major areas.
| (a) | CLEANING COMMON AREAS AND ENTRANCES – Interior common areas include the wall and ceiling surfaces of entries, hallways, corridors, stairwells, elevators and escalators. Cleaning activities include mopping floors, vacuuming carpets, cleaning windows and walls, removing cobwebs, collecting and disposing of trash, and checking and replacing light bulbs. Individuals responsible for these tasks should be well trained on correct usage, storage and disposal of all cleaning products. | |
| (b) | LANDSCAPING CARE – Maintaining the landscaping is seasonal and requires different activities at different times of the year. Landscape care involves cutting the grass, raking leaves, removing dead plants, planting new plants, maintaining erosion control areas, applying fertilizer, watering as appropriate, and pruning shrubs and trees. It is common in property management for landscape care to be contracted to a professional landscaping firm, under the supervision of the property manager. | |
| (c) | MAINTAINING PARKING AREAS, DRIVEWAYS, WALKWAYS, AND EXTERIOR ENTRIES – Custodial maintenance of parking areas, driveways, walkways, and entrances means keeping these areas clean and litter free throughout the year although some activities may be seasonal such as removing snow in winter and raking leaves in the fall. Custodial maintenance also includes checking and replacing the lights in the parking area and along the walkways. Keeping oil and caustic fluids from sitting in the parking and walkway areas will assist in maintaining the appearance as well as the integrity of each of these areas. | |
| (d) | CLEANING EXTERIOR SURFACES AND SIGNAGE – The exterior components and the finish of a well-managed building are clean and well maintained. The custodial staff checks for problems that need corrective maintenance and repair and inspects and cleans all exterior signs. Windows in commercial and apartment buildings may be cleaned by staff or by a contract service. | |
| (e) | MAINTAINING AMENITIES – Interior amenities of the building may include vending machine areas, employee lunch rooms, lounges and restrooms, and tenant laundry rooms. All these areas need regular, if not day to day, custodial maintenance. Other areas such as a health/fitness club and a day care center need daily custodial maintenance. Exterior amenities may include swimming pools, tennis courts, and jogging tracks. The custodial maintenance requirements of these items differ from each other and change from season to season. Therefore, scheduling is an important aspect of the custodial maintenance of these areas. Associates who maintain these amenities should be fully educated on the proper methods of cleaning each amenity so that improper cleaning does not damage any surface or equipment. |
CORRECTIVE MAINTENANCE
While custodial maintenance involves tasks the manager can schedule in advance on a daily, weekly, or monthly basis, corrective maintenance involves activities that are not routine operations but that arise in response to requests from the custodial personnel, tenants, or from management inspections. Corrective maintenance occurs after a problem arises but before the problem leads to a major breakdown and/or an emergency.
The property manager needs a manual of operations or a specific procedure to handle requests for corrective maintenance. The manual should identify the procedures by which tenants and maintenance staff can request repairs and should state whether requests for repair need to be written or whether they can be oral. The operations manual can also specify the manner in which the property manager records repair requests. Many property management firms use a work order form and a work order ledger to record requests and to schedule corrective maintenance. A properly designed work order form should record the following information:
| (a) | the name of the resident or employee requesting the repair work; | |
| (b) | the specific location of the problem; | |
| (c) | the time and the date of the repair request; | |
| (d) | the phone number of the individual making the request with permission to enter the premises either at a scheduled time or anytime | |
| (e) | the nature of the problem and an evaluation of its severity to establish its priority for completion; and | |
| (f) | any restrictions that may affect the ability of the repair person to enter the property to make the required repair. |
The work order form can also contain specific information about the completion of the repairs. These additional items may include:
| (a) | the amount of time spent on the repair; | |
| (b) | the nature of the materials required to complete the repair; | |
| (c) | the cost of both labor services and the materials; | |
| (d) | the name of the person or contractor who did the repair work; and | |
| (e) | the name and signature of the staff member, or his or her initials, certifying that the repair was completed. |
The maintenance manual can also identify a list of priorities for corrective maintenance, such as:
| (a) | repairs that could affect the safety and the health of the tenants or cause damage to the property; | |
| (b) | repairs that can cause a hardship or an inconvenience to the tenant and thereby affect the suitability of the property for the use identified in the lease; | |
| (c) | repairs affecting the public areas, common areas, and the grounds that make the property attractive to the tenants, prospective tenants and the public; | |
| (d) | repairs of apartments and commercial space involved in turnkey operations as existing tenants move out and new tenants move in; | |
| (e) | cosmetic repairs that do not fall into the previous four categories; and | |
| (f) | Preventive maintenance operations. |
PREVENTIVE MAINTENANCE
Preventive maintenance attempts to eliminate or at least reduce the need for corrective maintenance and by that preserve the physical integrity of the property. Preventive maintenance also reduces the number of emergency repairs by anticipating normal wear and tear to the property and its mechanical systems. The regular inspections involved in preventive maintenance detect potential problems before they occur and allow for an early resolution or repair of the problem. For these reasons, preventive maintenance is a very important component in a successful property maintenance program. The proper functioning of a preventive maintenance program requires the participation and commitment of the owner, property manager and the maintenance staff. The property manager can also train tenants to participate in a preventive maintenance program by showing them what items to inspect periodically. A successful preventive maintenance program will address the following items:
| (a) | exterior structural features such as entry ways, exterior wall surfaces, roof covering, windows and window frames, doors, electrical fixtures, gutters and downspouts; | |
| (b) | the grounds including the landscaping, parking areas, roads, and signage, and site amenities such as swimming pools, tennis courts, and playgrounds; | |
| (c) | interior building features such as entry ways and lobbies, clubhouse rooms, floor coverings, wall coverings, ceilings, doors, windows, lighting fixtures, and electrical outlets and in residential units, appliances, sinks, showers, bathtubs and toilets; and | |
| (d) | major mechanical equipment such as heating, ventilating and air conditioning (HVAC) systems; security systems such as sprinkler and alarm systems; elevators; appliances; and plumbing fixtures. |
The property manager must plan regular inspections of all of the items on this list to have a successful maintenance program. Such a preventive maintenance program requires a property manager to do several things.
| (a) | They must prepare a list of all items that require maintenance service recognizing annual, seasonal, or monthly needs. Frequency of use and load must be considered. | |
| (b) | The property manager and maintenance team must evaluate the nature and the frequency of the maintenance service needed for each item. Age of the item and frequency of use will play a key factor in these evaluations. | |
| (c) | They must estimate the approximate cost of each preventive maintenance task. This step allows the property manager and maintenance team to make a judgment about the cost effectiveness of this preventive maintenance task. For example, if the cost to repair an item under a corrective maintenance procedure is less than the cost associated with the inspections under a preventive maintenance program, then preventive maintenance may provide no advantage. On the other hand, if the item is cheap to repair under corrective maintenance but can cause great inconvenience to the tenants when the item breaks down, then the preventive maintenance program is effective. It would be effective even if it does not appear to be, given the hard costs associated with preventive maintenance. | |
| (d) | The manager and maintenance team must schedule the routine inspections. Some items may require short-term inspections, while other items may require an inspection on a seasonal or annual basis. The maintenance manual should specifically identify the inspection routine for each important item of preventive maintenance. The property manager could develop a checklist or a form that lists these items and the frequency of their inspection. The person responsible for making the inspection can fill out the form by placing the dates of inspection of each item next to the item in the list as well as provide any observations or actions taken. | |
| (e) | As the routine inspections proceed, the property manager may decide to adjust the inspection schedule. Infrequently inspected items may need a more frequent inspection routine. Frequently inspected items may need less frequent or a less stringent inspection routine. In addition, the routine inspection of the building’s exterior, interior, grounds, and mechanical equipment may reveal items that are not on the preventive maintenance list but should be. |
EMERGENCY MAINTENANCE
An emergency repair involves a problem or malfunction that poses an immediate threat to the life, health, or safety of the tenants or damage to the property. Such problems include broken water lines, leaking gas lines, loose electrical wires or connections, broken or blocked sewer lines, non-working elevators and escalators in high-rise buildings, fires, floods, and vandalism. These problems require immediate response by the property manager and maintenance team.
Managing emergency maintenance and repair starts with proper planning for an emergency and establishing procedures to handle emergency repairs. The first step in the process is for the property manager to provide tenants with a 24-hour emergency telephone number to call in case of an emergency. The emergency telephone number might be the property manager’s office number during normal business hours with an answering service taking over when the office is closed. The second step is for the property manager to publish a list of people to contact in case of emergency ensuring all management members, answering services, and contractors are familiar with this list. The list could include the appropriate maintenance staff person or a contractor to contact for an electrical problem, a plumbing problem or a mechanical breakdown in the HVAC system. Third, the manager should prepare a building evacuation plan and make the on-site personnel and the tenants’ familiar with the plan and with the circumstances that demand an emergency evacuation. For example, staff and tenants should evacuate when there is a leaking gas line, but a broken water line may not present any immediate danger to people. Occasional review and exercise of these plans with the tenants and staff is highly recommended.
DEFERRED MAINTENANCE
Deferred maintenance is postponing corrective maintenance to a later time. Deferring maintenance occurs because of cash limitations and budget restrictions, the present unavailability of materials or laborers, a decision regarding timing of the repair, or negligence of the property manager. If an owner or the property manager intentionally postpones repairs, the property manager should record them as deferred and remember to handle them at the first opportunity.
Deferring corrective maintenance and repair can lead to serious problems in the future. In some cases it merely leads to a more severe corrective maintenance problem; in others, it necessitates emergency repairs. Careful consideration of these consequences and the cost of these deferred items needs to be weighed against the cost of completing the repair at an earlier date.
NEW CONSTRUCTION AND REHABILITATION
The property manager may recommend to the owner additions to the property, remodeling, or rehabilitation of the structure that will help retain existing tenants and attract new tenants, thereby enhancing the value of the property and the financial return to the owner. If the owner agrees with the recommendations, he or she may ask the property manager to manage the construction of the improvements and to select, or assist in selecting, a general contractor. As an alternative, the property owner may ask the property manager to serve as the general contractor. In this event, the property manager’s knowledge of and experience in supervising construction work is the important element in the decision to take on this task. If the property manager has such experience, he or she could handle the tasks of selecting subcontractors and supervising their work product. However, if the property manager does not possess such knowledge and experience, selecting a general contractor is probably a better alternative.
The second decision is whether to seek competitive bids or to negotiate a contract for the construction work. For competitive bids, the property manager invites several general contractors to give estimates on the work based on a written scope of work provided by the property manager. The property manager reviews these cost estimates and selects the best bidder. At times, the best bid is the lowest bid. However, at times the best bid may not be the lowest bid. If the property manager detects a substantial difference in either the quality of the construction or materials going into the job, he or she may recommend a bid other than the lowest bid. If the property manager serves as the general contractor, then he or she seeks competitive bids from each subcontractor An alternative to the competitive bid process is the negotiated contract procedure. Here the property manager selects a general contractor to do the work if the contractor’s cost proposal is reasonable and acceptable. The property manager first gives the general contractor a set of specifications detailing the required work. The general contractor prepares an estimate of the total construction costs. This cost estimate is the beginning of negotiation. For example, if the property manager needs to reduce the total construction cost by 10 percent, the general contractor reworks the estimate to see if the 10 percent reduction is possible without compromising the quality of the job. At some point in this negotiation the property manager and general contractor agree to the total cost of construction and the nature of the construction.
Another decision involves whether to negotiate a fixed fee or “cost plus” construction contract. The fixed fee contract is the most common. In this arrangement, the general contractor includes a profit margin for his or her services in the contract. Based on the general contractor’s ability to estimate total construction costs, he or she will receive the profit margin originally estimated, receive less than the anticipated profit if subcontractor costs are higher than expected, or receive more than the estimated profit if actual costs are lower. If the contract is a “cost plus” agreement, the general contractor prepares an estimate for the construction project. This estimate should be as precise as possible and should include the costs for all subcontractors. Then, the property manager and the general contractor agree to the general contractor’s compensation which is usually a fixed percentage of the cost of the construction project.
If the property manager selects the cost plus contract, he or she can protect the property owner’s interest by establishing a “not to exceed” figure in the contract. For example, if the general contractor estimates the cost of construction at $30,000, the property manager and the contractor could agree that, in any event, the total cost of construction will not exceed the estimate plus 12 percent. Therefore, the maximum the owner will pay in this example is $33,600.
If the best reasonable estimate of the construction cost is $30,000, completing the construction work for less than $30,000 without a sacrifice of quality would obviously benefit the owner. Therefore, the contract could include an incentive to the general contractor to bring the job in under the contract price. For example, if estimated construction costs are $30,000 while the actual construction costs are $27,000, the construction cost savings would be $3,000. By prior agreement, the general contractor could receive a portion of the savings in addition to the profit margin negotiated in the construction contract.
If the construction project is a large one, the property manager should require a performance bond. A performance bond is, in a sense, an insurance policy for the completion of the work should the general contractor have any financial or other problems that keep him or her from completing the construction in a timely manner. For a fee, an independent bonding company guarantees completion of the work should the contractor fail to finish the job and assumes the responsibility of finding another contractor to complete the work according to the original specifications.
The property manager should always evaluate the general contractor or the subcontractors being considered for the job. This evaluation includes requesting the names of people for whom the contractor has done work in the past, checking with those references to evaluate the reliability of the contractor and the quality of his or her work, and requesting the evidence needed to evaluate the financial stability of the contractor’s company. The property manager could also perform a formal credit check and request an audited financial statement. The property manager should also ask the contractor to provide a business license and proof of suitable insurance coverage.
SECURITY AND SAFETY
Since crime is of great concern to most tenants, provisions for personal security and property security are very important factors in both residential and commercial facilities. Therefore, security is a major concern of the property manager. A good, visible security program can reduce tenants’ perception of the risk of crime and may also reduce the incidence of crime. However, even the best security program cannot guarantee safety or eliminate crime.
Security programs and systems utilize various degrees of personnel and technology. At one end of the spectrum, a security program can consist of equipment that requires virtually no personnel to operate and is nearly maintenance free. At the other end of the spectrum, the security system can be both labor intensive and technologically sophisticated. For example, the use of locks, alarms and lighting represents the minimum-personnel form of security system. Guards and video cameras represent the labor intensive, technologically sophisticated security system. The property manager and the property owner must find the appropriate combination along the spectrum for the specific property. Whatever security system is selected, the property manager must make certain that it is well maintained.
The property owner may be liable to tenants if he or she fails to implement security programs when the owner has a reasonable expectation of crime occurring on the leased premises. The property owner also may become liable to tenants if the security system is in place but the owner or manager fails to maintain it, leading to crime against the tenant. The property manager should advise the owner of the need for security programs and systems and establish a procedure based on both corrective and preventive maintenance for the security devices.
Efforts at crime prevention include actions to discourage or prevent a criminal’s access to the property and actions that increase the probability of the criminal’s being discovered and caught. Preventing a criminal’s access to the property includes the use of locks, gates, and fences as well as key control programs and educational programs to inform tenants on proper procedures to maintain the security of the building. Activities that increase the discovery or detection of the criminal include proper lighting of the grounds and the common areas of the building, eliminating areas on the grounds where the criminal can hide, eliminating areas along the exterior portion of the building that could hide a criminal’s attempts to enter the property, and installing interior detection devices that identify motion. All these devices and actions contribute to crime prevention by making the property less of a target for criminal activity.
Identifying areas where criminals can hide near the building requires a detailed inspection of the premises by the property manager. The property manager should inspect the property under both daylight and nighttime conditions to identify places where the shrubs are too high or too dense, where parts of the property are not visible due to barriers such as storage buildings or trash receptacles, and where nighttime lighting is not adequate.
Property owners may be liable for crimes committed in apartments, even if the tenant signed an exculpatory clause in the lease holding the landlord harmless. Georgia law provides that contractual provisions protecting a landlord from its sole negligence for repair of the premises are void, as they are against public policy. In one case, the court found that the landlord could be liable to a tenant for stolen jewelry by letting a furniture leasing company into the apartment even though the lease had an exculpatory clause and the tenant gave permission for the leasing company to enter. Georgia courts may sometimes uphold exculpatory clauses, but the important point is that these clauses will not relieve the owner of liability for all forms of damage to the tenant. Therefore, the property manager should seek competent legal advice before relying on an exculpatory clause. Crimes against a person present a more serious source of liability. In another case, the court found that the landlord may be held liable for a rape in the tenant’s apartment. The landlord knew about previous break-ins and did not take proper security measures.
Keeping tenants informed of ways to keep themselves and their belongings secure as well as keeping them informed of other crimes in the area are additional ways to keep your residents involved and make them a partner in reducing the likelihood of your property being a target of crime.
ON-SITE STAFF AND SERVICE CONTRACTORS
The property manager may need to make a decision about the allocation of property maintenance services between in-house or on-site maintenance personnel and contractors who provide specialized services. The services that managers typically contract to independent service providers include trash removal, pest extermination, pool maintenance, window cleaning, landscaping, elevator and escalator maintenance, cable and telephone installation and maintenance, painting and HVAC service. The principal benefit of using independent and specialized service providers is the specific knowledge and experience of the service provider. The contractor also provides adequate training of the service personnel in the latest developments in materials, equipment, and service techniques and provides the necessary tools and equipment to perform the service. The principal advantage of using in-house or on-site maintenance personnel is the greater degree of control the property manager has over their activities. The property manager can schedule the staff to work as needed whereas service contractors may create their schedules weeks in advance and may not be able to adjust those schedules to handle the immediate service needs of the property manager. The property manager must also consider whether the in-house maintenance team is properly trained to complete the repairs correctly and safely. The tools needed to make the repairs, the ongoing training and materials needed to keep on hand as well as the upkeep of all of these materials and tools will need to be evaluated to determine whether in-house will be cost effective and meet the tenants’ needs.
For the property manager who uses both in-house or on-site personnel and specialized service providers, an important duty is the distribution of work between the staff and the independent providers. The property manager’s goal is to obtain the best quality service for the lowest cost from both the contractors and the staff.