Chapter 50

Tenant Relationships and Policies

Disclaimer regarding the Lease: Even though legal information appears in this chapter it is not intended to be legal advice as per that stated by an attorney. When dealing with a lease the tenant and the landlord are advised to seek legal advice from an attorney.

INTRODUCTION

Tenant relationships are an important concern for the owner and the property manager of any  property.  Tenants are the revenue source for the property and therefore are a key element in the financial success of the property.  Tenant relationships start before the signing of the lease and continue after the lease is in effect.  The pre-lease phase of tenant relationships consists of the marketing program initiated for the property, the tenant selection criteria and process, and the fair housing implications of the tenant selection process.  Tenant relationships after the signing of the lease include rent collection procedures, security deposits policies, move-in and move-out policies, and tenant relationships during the term of the lease.

MARKETING THE PROPERTY

A marketing plan for the property starts with an understanding of the features and characteristics that the property offers to both current and prospective tenants.  To understand those features, the property manager must investigate the quantitative and the qualitative aspects of the property.  In residential leasing, quantitative features which include the structure, the site and the location should be analyzed:

(a) property characteristics include the size of the apartments; the mix of apartments (studios, one, two, and three bedroom units); the age and condition of the property and its most recent renovation; security features; the appliances; and the fixtures such as carpeting and lighting are important quantitative characteristics.

(b) on-site amenities include the availability and the physical condition of a swimming pool, a recreational area, landscaping and tennis courts are also important property features.

(c) the property’s location includes the proximity of the property to employment centers, schools, shopping centers, recreational and entertainment opportunities.

For fair housing purposes, make sure you never promote aspects of the property such as its proximity to places of worship or aspects of its location that might appeal to particular ethnic groups.

Qualitative features to investigate include:

(a) the property’s attractiveness, which relates to a person’s perception of the architectural style of the apartment buildings; the floor plan design of the units; and the condition of the exterior of the building and the parking areas.

(b) The usability of the on-site amenities and its grounds and

(c) neighborhood prestige as perceived by current and prospective tenants.

Once the property manager knows the quantitative and qualitative characteristics and features of the subject property, he or she can compare it to other properties in the immediate area.  This process is similar to the selection of comparable properties to the appraiser or the survey of the competition to the market analyst.  The property manager compares the quantitative and qualitative aspects of the subject property to the same aspects of other apartment buildings in the same spatial area to identify the directly competitive properties.  The purpose of the analysis is to determine whether the subject property provides the same set of amenities and features as the competition, is better than the competition, or is inferior to the competition.  Knowledge of the relative position of the subject property to the competitive properties helps the owner and the property manager determine both the market rent rate and thus the subject property’s rent rate, as well as the nature and the extent of  the marketing plan necessary to obtain tenants from the pool of prospects.

DEVELOPING THE PROMOTIONAL MESSAGE

When the property manager understands the property’s quantitative and qualitative characteristics and its amenities and understands the most likely tenant profile, he or she can develop a promotional message and select the best advertising media.  The first step in this phase is to develop an advertising budget specifying the amount of money available for advertising.  Based on both the size of the development and the available funds, the property owner, with the help of the property manager, can decide whether the property manager or a third party will handle the advertising.  In either event, an independent advertising agency may be a valuable component of the advertising program.  No matter who is in charge of the advertising campaign, a limited number of advertising options are available.  These options include:

(a) advertising in the classified section of the paper as well as the purchase of special display advertisements in the newspaper;

(b) Internet – a web site for the complex/project and advertising on any marketing websites relevant for the property;

(c) signage (on-site signs);

(d) brochures for direct mail;

(e) radio and television advertising;

(f) locator and referral services; and

(g) Press releases.

Each of these advertising options has advantages and disadvantages in terms of costs, appeal, and market coverage.

MARKETING INCENTIVES

The property manager may discover that the market requires the property owner to provide prospective tenants with special rent arrangements and other items important to the tenant.  When demand for apartments, retail space and offices is high and there are very few vacancies, there is little or no need for any special incentives.  However, when demand is low relative to the supply of space with the resulting high vacancy rates, these marketing incentives (or rent concessions) may be crucial to renting the space.  In the residential market, the concessions may include:

(a) free rent, a situation in which the tenant signs a 12 month lease but only makes 11 months of rent payment. Recently, the free rent is given in the first month of the lease in apartments; however, from a financial perspective it should be the last month of the lease period.;

(b) gifts and/or referral fees  if the tenant renews his or her lease, or a finder’s fee or rent rebate if the tenant locates a new tenant who signs a lease for a unit in the property;

(c) free services or amenities such as covered parking, cable television or health club membership.

Whatever the form of the marketing incentive or rent concession, the wise property manager will utilize only the marketing incentives that the public perceives to be in good taste and shedding a favorable light on both the property manager and the subject property.  In a commercial context the marketing incentives or rent concessions take a different form than the residential incentives.  Commercial rent concessions include:

(a) free rent negotiated at either the front end of the lease, the back end of the lease, or across the term of the lease;

(b) tenant improvement allowances in the form of a predetermined number of dollars per square foot that the tenant can use to finish the space in a way that is most beneficial to the tenant;

(c) moving allowances paid by the property owner to defer the expense the tenant has in relocating either the retail establishment or the office;

(d) free parking to office tenants for a predetermined number of the firm’s managers and staff; and

(e) interior space design and planning services at the property owner’s expense to assist the tenant in using the square footage to its best advantage for the firm.

Again, the commercial rent concessions in the lease need to be tasteful and conform with community standards.  In addition, the property manager must carefully consider the financial impact of these rent concessions.  The property manager and the owner can calculate the difference between the asking rent on the space and the effective rate realized after the rent concessions.  If the property owner makes a front end outlay of ten dollars per square foot of space for tenant improvements, picks up a seven thousand-dollar moving bill and gives up two hundred dollars a month in parking deck revenues because of the free parking, the $16 per square foot per year rent that the property owner receives is not the effective rent.  The effective rent is the $16 per square foot less the front-end tenant improvement allowance, the moving expense payment, and the loss of parking revenue.

MEASURING MARKETING EFFECTIVENESS

After the property manager decides the marketing approach and the nature and extent of incentives to implement, he or she needs to establish a format to measure their effectiveness.  The first step in this process is to create a rental inquiry or prospect card and filing system for the information.  This card may contain information about the individual or the firm that asked about the space such as the name of the prospect, the address, and phone number; the type of unit or space wanted; the date the space is needed; the rent rate quoted to the prospect; and other pertinent information.  The rental inquiry card can also contain a statement summarizing the reasons why the prospect considered the subject property and the important elements in the prospect’s decision making.  Once the property manager establishes the inquiry or prospect card and file system, it can generate information about the advertising outlay per prospect and the conversion ratio — a measure of the number of inquiries and prospects to the number of signed leases. The rental inquiry/prospect card can be, and more than likely should be a digital file in a program that allows quick retrieval and various presentation formats for the acquired data.

TENANT SELECTION CRITERIA

The property manager cannot make a complete analysis of every residential or commercial tenant who applies for space in the subject property.  Some of the tenant selection criteria are supportable by market data while other aspects are not.  In the latter event, the property manager can only operate subjectively, use sound judgment, and realize that a degree of uncertainty exists when selecting tenants.  The principal tenant selection criteria include the tenant’s financial status, credit rating, previous occupancy history, compatibility with other tenants, and attitudes toward cleanliness.

(a) FINANCIAL STATUS AND CREDIT RATING – The ability to pay rent is one of the most important tenant selection criteria.  The property manager serves the owner’s best interest by verifying a prospective tenant’s financial references.  Property managers who want to make a thorough analysis of a prospective tenant can submit a formal request to a credit reporting company which will provide the property manager a confidential report on the prospect’s financial reliability.  For a residential prospect, the credit reporting company will provide information about previous rent payments and the regularity with which the prospective tenant made those payments; the usual method of making the payment; and all outstanding balances on checking accounts, savings accounts and installment credit accounts including credit card balances.  The credit report will also show (usually in some form of coding system) how promptly the prospective tenant meets his or her financial obligations and whether they have bad debts, late payments, a court judgment against them, or a recent bankruptcy.

The property manager can obtain information about the financial status of a commercial tenant from Dunn & Bradstreet.  The tenant receives a rating on the basis of its assets, liabilities and general financial well-being or strength. Dunn & Bradstreet rates the prospective tenant with a coded credit rating for financial strength that ranges from a high of number 5A down to HH and a composite credit rating of high, good, fair, or limited.

For the residential tenant, the financial status that he or she will have during the term of the lease depends on employment stability.  Therefore, part of the tenant selection process for a residential tenant requires obtaining the prospect’s employment history which gives information about employment stability.  However, the property manager may need to temper his or her judgment about the historical record of employment stability with a judgment about the extent of that stability in the future.  For example, a history of 20 years employment with one company does not promise job stability if the company just announced a plant closing.  Conversely, a tenant who has changed jobs in each of the last four years may be an excellent prospect if each job change led to an advancement and a pay raise.  The point is that knowledge of the local employment situation and knowledge of specific elements of each prospective tenant’s employment pattern require more than a mere written display of the past. The property manager needs to interpret the historical record, apply his or her knowledge of current events, and use good judgment.

Occupations such as the construction trades by their nature do not provide stability of employment with one firm even though the tradesman can be continuously employed with successive firms as one project is finished and the next project with a different firm picks up.

(b) OCCUPANCY STABILITY – Tenant selection criteria also involve identifying tenants who have a high probability of renewing the original lease.  Frequent residential or commercial turnover in occupancy generally creates greater than normal advertising, marketing, and fix-up expenses between leases.  Therefore, frequent turnover generally leads to revenue loss because of vacancies between the end of the original lease and the starting date of the replacement lease.

(c) COMPATIBILITY WITH OTHER TENANTS – The property manager must realize that the satisfaction of each individual tenant depends upon the compatibility of all tenants in the building or on the property.  In residential property, the tenants should have some important common characteristics such as lifestyles, family or household status, and possibly occupational status and income.  However, the search for tenant compatibility in a residential building must not lead the property owner to make unwarranted assumptions and thereby lead to any form of unlawful discrimination.

In a retail context, tenant compatibility usually refers to the creation of a tenant mix in a shopping center that maximizes customer traffic and facilitates the customer’s desire for multi-stop shopping.  In a neighborhood shopping center effective tenant mix requires a viable anchor tenant, usually a supermarket, and an array of convenience goods and service providers such a drug store, dry cleaner, video store, gift shop, and personal care establishments such as beauty salons.

In the regional shopping center, the appropriate tenant mix would require two or more department stores as anchor tenants with specialty clothing stores for men, women, and children; shoe stores; women’s accessory stores, jewelry stores, gift shops, and novelty shops that serve to expand the selection and diversity of products that a shopper will find in that one location.

The retail property manager avoids placing incompatible tenants in the shopping center, or if necessary, places incompatible tenants at substantial distances from each other.  For example, a motorcycle and lawnmower repair shop is not a desirable neighbor for the supermarket, card and gift shop and the nail salon in a neighborhood shopping center.  However, if the circumstances of the market and the financial position of the shopping center require the property manager to consider leasing to incompatible tenants, then the property manager tries to separate physically the incompatible tenants.  The property manager could place the repair shop, the bait store and the pawn shop at one end of the center while grouping the more typical tenants at the other end of the center.  The anchor tenant could be the dividing point between the two groups.

In office buildings tenants with a very high volume of clients, customers and/or visitors may be undesirable tenants for the other tenants who do not have such high levels of usage.

(d) CLEANLINESS – A large portion of the building maintenance expenditure is routine housekeeping.  The cleanliness of the tenants’ quarters and the public or common areas have a significant impact on the desirability of the property to prospective tenants.  Consequently, property owners prefer tenants who are good housekeepers to tenants who are untidy.  Moreover, maintenance expenditures are less in a building with good, clean tenants than in one with messy tenants.  However, the level of a prospective tenant’s attitude toward cleanliness is difficult to identify.

If the tenant’s attitude toward cleanliness is difficult to identify at the time of lease negotiation, the property manager needs to monitor each existing tenant’s practice of cleanliness during the lease term.  Based on these observations, the property manager can make recommendations and if necessary, requirements, designed to keep the property clean and free of litter and debris.  The property manager will also have information that could be very relevant in his or her evaluation about renewing the lease of a habitually messy or untidy tenant.

The owner and the property manager should devise a written standard to set a minimum requirement for tenant cleanliness. These standards could be viewed in the same light as the protective covenants in a residential subdivision.

FAIR HOUSING AND THE RESIDENTIAL TENANT SELECTION PROCESS

A full appreciation of the effects of fair housing legislation and residential tenant selection involves studying fair housing legislation.  The property manager should understand and avoid the following illegal practices summarized and extracted from the fair housing laws.  These laws prohibit any and all acts of discrimination based upon race, color, religion, sex, handicap, familial status, or national origin.  The following activities violate the fair housing laws:

(a) refusing to rent or sell, or to negotiate for rent or sale;

(b) discriminating in the terms, conditions or privileges of the sale or rental of a building, or in the provision of services or facilities in connection with the sale or rental;

(c) making, printing, publishing, or causing to be made, printed or published any notice, statement or advertisement, with respect to the sale or rental of the dwelling that indicates any preference, limitations or discrimination;

(d) representing to any person that any dwelling is not available for inspection, sale or rental when such dwelling is in fact available; and

(e) inducing or attempting to induce any person to sell or rent any dwelling by representations regarding the entry or prospective entry into the neighborhood of a person or persons of a particular race, color, religion, sex, handicap, family status, or national origin (the practice of blockbusting).

In the past, the judicial system has interpreted Fair Housing Laws very broadly in favor of the protected classes of individuals identified in the definition.  The court cases provide examples of some practices that have been found to be illegal.  These illegal practices include:

(a) steering, a situation in which non-minority prospects are directed to non-minority properties or communities but minorities are not directed to those properties or communities or in which minorities are directed predominantly to minority properties and neighborhoods;

(b) selection procedures that disqualify minorities more than they disqualify non-minority prospects;

(c) eviction of a non-minority tenant for having a minority spouse, roommate or guest;

(d) discouraging minority applicants by giving them inaccurate information or less information than is provided to non-minority applicants.

(e) using delaying tactics of any form in dealing with minority applicants;

(f) selective advertising;

(g) discriminating against brokers who solicit minority tenants for predominantly white buildings; and

(h) insisting that an apartment is unavailable if the prospect is a member of a minority or protected class.

The U.S. Department of Housing and Urban Development and various housing and civil rights groups test for compliance with federal and state fair housing laws to make sure that property owners and property managers follow the fair housing laws.  As part of these tests individuals of different races and different protected classes approach rental agents pretending to buy or rent residential space.  In addition, a non-minority individual who is not in a protected class also approaches the same property separately at approximately the same time and offers similar, but not identical, financial and personal details.  The courts accept the evidence provided by these testers to prove discriminatory behavior against minorities and members of the protected classes.  The practice of testing has been found to be legal.

A property management company can generate internal tests of fair housing compliance by hiring its own testers to visit the properties in its portfolio.   The information generated by this internal procedure is valuable in evaluating the company’s leasing program and the actions of its leasing agents.

RENT COLLECTION POLICY

Most residential and commercial tenants pay the rent on time and do not need special handling by the property manager.  However, the property manager needs an operations manual containing policies and procedures to deal with those tenants that do not pay their rent as stipulated in the lease.  There are two important points regarding rent revenue.  First, rents come from the occupied units, not from the vacant units.  Second, rents come from the tenants who pay for the space they occupy.  Rents do not come from all occupied space.

A good rent collection policy and procedures manual will contain clear and explicit statements regarding when, where, and how the tenants are to pay the rent and how to deal with tenants who become delinquent in their rent payments.

(a) WHEN THE RENT IS TO BE PAID – Most policy manuals state that the rent is due in full, in advance, on or before the first day of the occupancy period. In most residential situations rent is due in full and in advance on or before the first day of the month.  The policy manual should specify any grace period that may be allowed.

If special circumstances exist, the rent may be due on any day of the month such as the 15th of the month.  The policy manual should identify the circumstances and procedures that allow this due date.  For example, the tenant takes occupancy on the fifteenth and wants to schedule the rent payments to coincide with his or her pay period that occurs on the first and the fifteenth of the month.

(b) WHERE THE RENT IS TO BE PAID – The rent collection policy will clearly state whether the tenant pays the rent personally or by mail to the on-site property manager or send it to the administrative offices of the property management firm.  Some property management firms require tenants to place the rent payment in a lockbox at a specified commercial bank.  Regardless of the procedure required by the property management company, it is imperative that the tenant have a clear understanding of the procedure.

(c) HOW THE RENT IS TO BE PAID – Tenants may offer to pay rents in cash, personal check, certified check or money order.  The property manager needs to have a consistent policy regarding the form in which he or she will accept rent.  If the property management company wants the tenants to pay the on-site property manager, the property management company may institute a prohibition against cash payments of the rent.  This decision might result from a concern about the potential for robbery or employee theft.  If the on-site management staff accepts personal checks as payment of rent, then the rent collection policy must address the issue of checks returned for “Not Sufficient Funds.”  Most property management companies impose a service charge on the tenant who submits an “NSF” check to cover both the charges from the bank for handling the “NSF” check as well as the additional administrative costs incurred by the property management company.  The rent collection policy needs to explain all of the details and the specific charges.

If a tenant has repeat offenses regarding “not sufficient funds (NSF)” checks, then the property manager may wish to impose the requirement that this specific tenant pay rent in the form of a certified check or a money order.  If this is the property manager’s desire, the rent collection policy manual should explain the requirement to the tenant in detail.

(d) DELINQUENT RENT PAYMENTS – The rent collection policy manual must also handle the issue of delinquent rent payments.  Conceptually, a rent payment is delinquent when it is not made on the appropriate date identified on the lease.  However, most property managers and property owners are lenient and provide the tenant with a “grace period.”  The lease may specify that the rent is due on the first of the month but must be paid no later than the 3rd or 4th day of that month.  When such a grace period exists in the lease, practice has proven that most of the rent collection will occur toward the end of the grace period.

If the property manager or owner does not receive the rent payment by the end of the grace period, the payment is delinquent.  The rent collection policy manual must specifically and explicitly address the collection of delinquent rent as well as any applicable late charges.  The rent collection policy manual should establish a schedule of steps for the property manager to follow during the rent payment process.  If the rent is due on the first of the month and there is a five-day grace period and if the tenant does not pay the rent by the third day of the month, the property manager can place a reminder note in the tenant’s mailbox or slide it under the front door.  This note would simply say that it is time to pay the rent and that the grace period only extends for another two days.  If the tenant does not pay the rent by the fourth day, the policy manual could suggest the need for personal contact.  The property manager calls or visits the tenant and gives the tenant a twenty-four-hour oral notice.  The personal visit to the apartment allows the property manager to find out whether the property is still occupied, to obtain a reason for nonpayment of rent, and to discover the tenant’s attitude and capabilities for paying the rent.  The property manager can discover whether the tenant can pay the rent and when he or she will pay the rent.  If  by the end of the fifth day the tenant does not pay the rent and the tenant offers no explanation, the policy manual may instruct the property owner and property manager to give the tenant notice to surrender the property and vacate the premises.  This note could further identify the legal proceedings that the property manager will use to evict the tenant under state law.  At some point after the five-day notification, but before the eviction, the tenant may step forward and offer to pay the rent.  In this case, the rent collection policy manual must offer the property manager direction.  Should he or she accept the payment of rent along with the late charges?  Should the eviction proceed?

The final item concerning delinquent rents is establishing a delinquency list in the property records.  This list would identify the resident by name, the space occupied, record the rent and late charge paid, any legal fees associated with the delinquency, and the number of delinquent payment notices sent to the tenant.  It would also record property manager comments regarding the situation at each of the delinquent periods and identify the starting date of dispossesionary or eviction proceedings.

SECURITY DEPOSITS

The legal aspects of security deposits appear in another part  of this guide and in Georgia Statutes.”  From the management perspective, the policies and procedures for security deposits should address three topics.

(a) The policies manual establishes the amount of the security deposit for the manager to negotiate in the lease.  In a residential lease the security deposit is typically one month’s rent.  However, it could be more or less.  For example, a residential lease might require an increased security deposit if the tenant creates special hazards to the property such as keeping pets.

(b) The procedures manual can direct the manager to maintain a file containing a checklist signed by the tenant identifying the condition of the property when the tenant took possession.

(c) The manual would also specify how the manager would keep a record of the date and the amount of the security deposit collected and the date on which the property manager returned it to the tenant.  If the property manager retains a portion or all of the security deposit, the file should contain a copy of the notice to the tenant outlining the amounts of and the reasons for deductions from the tenant’s security deposit.

MOVE-IN AND MOVE-OUT PROCEDURES

The lease should specify the move-in and move-out procedures for tenants.  The appropriate clause in the lease could stipulate that the new resident and the property manager will meet in the apartment prior to the tenant’s moving in.  The purpose of this meeting is to make a thorough inspection of the condition of the property and generate a list of damaged items.  The property manager and the tenant reach an agreement about whether the property manager will repair the items or let them remain as is.  The document records the decision reached between the new resident and the property manager.  Whatever form of the written document, the new resident and the property manager should sign the document.  This move-in inspection becomes an important item at the time when the tenant moves out of the apartment.  The written document serves as evidence of the condition of the property at the start of the lease.  The move in inspection also provides an opportunity for the property manager to discuss general policies and property rules with the incoming  tenant.  Items that the property manager should re-enforce during this discussion are the procedures and the time to pay rent, the procedures to obtain maintenance and repair services, the process to obtain extra keys, the care and use of appliances, and other issues that the property manager deems relevant.

The lease should contain a clause requiring the resident to notify the property manager of the resident’s intention to renew, in writing, usually thirty to sixty days before the lease termination.   If the property manager does not receive this written notification at the proper time, this is evidence that the resident will not renew the lease and is the first step in the move-out inspection process.  Many property managers contact the resident to remind him or her about the need for written notification; and if the property manager discovers the intent is not to renew, he or she can conduct an exit interview to learn the cause for non-renewal.   Many property managers draft an exit interview check list and survey to record the tenant’s responses.

On the day the tenant moves out and takes all of his or her belongings from the apartment, the property manager and the departing tenant should meet to do a move-out inspection.  The starting point for the move-out inspection is the move-in inspection document.  The move-out inspection will identify items of normal wear and tear and items of abuse and neglect.  Often, the resident will prefer to fix an item or to clean an item rather than to have the repair or cleaning charged against the security deposit.  As part of this inspection, the resident and property manager discuss items and settle any disputes about repairs and cleaning.  At the end of this discussion, the property manager and the outgoing tenant sign the move-out inspection report or form and, when possible, agree to the specific charges for each item.  This procedure allows the property manager to estimate the amount of the security deposit the departing tenant will receive.  When the property manager does not know the exact amount of these charges, the move-out inspection report focuses only on the need to repair and the need to clean.  The property manager and the tenant settle the financial arrangements after they discover the exact amount of the charges.

TENANT RELATIONSHIPS DURING THE LEASE TERM

Tenant relationships during the lease term involve communicating policies, procedures, and rules for the use of the property and its facilities.   While managers once used a tenant handbook to provide a list of rules, policies and procedures and brief explanations of these rules, policies and procedures,  nowadays owners have found out that a handbook is seldom provided and even less frequently read or understood by any type of tenant.  Also some management companies will include much of this information in a property or company website.  Because the Tenant Handbooks are expensive and time-consuming to produce they are not widely used any longer.
The property manager also needs a set of guidelines to handle items such as requests for repair services, complaints, accidental lockouts, and emergencies.