Retail Property Management Costs and Fee Guide

By Gary E. Wilson, President & Designated Broker, Wilson Management, Inc.

Retail management agreements contain two things other commercial agreements do not, and both affect what the fee actually buys: percentage rent administration, and a leasing function that materially changes the value of the asset rather than just filling space.

That makes the scope conversation more important here than the percentage. A manager who administers CAM competently but never verifies a sales report is leaving money uncollected. One who fills a vacancy without regard to the center's tenant mix can reduce what the rest of the space is worth.

This is how these agreements are typically structured and what to establish before signing.

Fee models

Percentage of collected revenue is standard. The manager earns a percentage of what is actually collected rather than billed, which aligns them with collections.

Percentage with a monthly minimum is common at smaller centers where a pure percentage would not support proper management.

The revenue base needs defining carefully in retail, because there is more in it than in most asset classes. Establish whether it includes base rent, CAM and expense recovery, percentage rent, promotional fund contributions, utility recharges, temporary and specialty leasing income, and any parking revenue.

Percentage rent and recovery income are the two to isolate. Recovery income is largely a pass-through, and including it in the base at the full rate produces a fee disproportionate to the work. Percentage rent, by contrast, is genuinely earned through administration — a manager who enforces sales reporting and reconciles breakpoints is doing work that produces that income, and there is a reasonable argument for it being in the base.

Leasing commissions are separate

This is the biggest structural difference from other commercial management.

Leasing is usually compensated separately from management, either as a commission per deal or through a leasing fee arrangement. The questions to settle:

• Is leasing included in the management scope, or a separate engagement?
• What is the commission structure for new leases, and for renewals?
• Are renewals commissionable at all, and at what rate relative to new deals?
• What happens where an outside broker represents the tenant?
• Who controls the leasing decision — the manager recommends and the owner approves, or the manager has authority within parameters?

Renewal commissions deserve particular attention. A structure paying full commission on renewals creates an incentive to churn rather than retain; one paying nothing creates an incentive to neglect renewals. Something in between is usual and the specifics matter.

What is normally included

• Rent, CAM and percentage rent billing and collection
• Arrears follow-up
• CAM reconciliation and annual true-up
• Sales report collection and percentage rent calculation
• Lease administration — critical dates, options, escalations
• Tenant relations and rules enforcement
• Common area management and vendor supervision
• Routine site inspection
• Promotional fund administration, where one exists
• Monthly financial reporting

What is normally excluded and billed separately

• Maintenance and repair costs themselves
• Capital projects — paving, roofing, lighting replacement, center refurbishment
• Leasing commissions
• Tenant improvement costs and allowances
• Marketing spend beyond any defined baseline, and promotional fund expenditure
• Legal costs
• On-site staffing, including any security
• Insurance premiums, taxes and licenses

Promotional funds need their own treatment

Where leases require tenants to contribute to a marketing or promotional fund, that money is collected for a defined purpose and accounted for separately from CAM.

Establish who administers it, whether the manager charges a fee against it, how spending decisions are made, and how it is reported to contributing tenants. Where a merchants' association exists, the relationship between it and the fund needs to be clear.

Tenants treat the promotional fund as their money in a way they do not treat CAM, and disputes over it are disproportionate to the sums involved. Getting the administration right is worth more than the amounts suggest.

Reporting to expect

Monthly, at minimum:

• Occupancy, and vacancy by unit rather than by square footage alone
• Rent roll with expiries and options
• Arrears, aged
• Sales performance by tenant, where reporting is obtained
• CAM recovery against actual expense
• Percentage rent status against breakpoints
• Income and expense against budget
• Maintenance completed and capital tracked

Sales data is the item most often missing and most worth insisting on. It is the earliest indicator of a struggling tenant, and a manager who is not collecting it is not in a position to tell you a renewal is at risk.

Questions to ask before signing

Fee

• What is in the revenue base — specifically, recovery income and percentage rent?
• Is there a minimum?
• Any other fees — construction management, promotional fund administration, technology?

Leasing

• Included or separate, and on what commission structure?
• How are renewals treated?
• Who decides, and within what parameters?

Retail-specific capability

• How do you track co-tenancy provisions across the rent roll?
• How do you maintain the schedule of exclusive use clauses?
• How do you enforce sales reporting?
• How do you approach tenant mix when a unit becomes available?

Operations

• How is CAM reconciled where anchors contribute on a different basis?
• What is the inspection cycle?
• Who manages capital projects?

Those retail-specific questions reveal depth quickly. A manager who cannot immediately describe how they track exclusives has probably not managed a center where one was breached.

What a manager should be adding

Beyond collecting rent, the value in retail management concentrates in four places:

Tenant mix decisions, because who occupies the space changes what the remaining space is worth.

Co-tenancy and exclusive administration, since both are contingent liabilities that stay invisible until they trigger, and both are expensive when they do.

Percentage rent enforcement, which is under-collected almost everywhere and also produces the sales data that predicts problems.

Common area condition, which in retail is a traffic decision rather than housekeeping — customers judge a center before they reach any tenant.

An agreement producing none of those is expensive at any percentage.

Self-managing a retail center

For a small center with a few stable tenants, an engaged owner can manage it well. The load rises sharply with tenant count, because each lease brings its own recovery structure, its own exclusives, and potentially its own co-tenancy provisions and percentage rent.

The specific things that are hard to sustain alone are the schedules — exclusives, co-tenancy triggers, option windows and sales reporting obligations across a rent roll — and the leasing judgment, since filling a vacancy in retail is a merchandising decision rather than a space-filling one.

The honest test: could you say today which co-tenancy clauses in your center would trigger if the anchor went dark, and what each affected tenant would be entitled to? If not, that is the exposure, and it is the one that costs most when it surfaces.

Comparing proposals

Retail scopes vary enough that a percentage comparison is close to meaningless on its own. Build a projected annual total for each: the fee on its defined base, plus leasing commissions at the structure proposed, plus everything billed separately.

Leasing is the variable that most changes the total, and it is the one most often left out of the comparison because it is compensated separately. A manager with a lower management percentage and an aggressive renewal commission structure can cost more than one with the reverse.

Then test the revenue assumptions. A manager forecasting improvement should name the mechanism — filling identified vacancies, enforcing percentage rent that is currently uncollected, correcting a CAM allocation that has been under-recovering, or remerchandising a weak part of the center. Anything arriving as a percentage with nothing behind it is a sales figure.

It is also worth asking what they would change about the tenant mix. The answer reveals whether they think about a center as a portfolio of interdependent tenancies or as a set of units to fill.

Where to go next

Our Retail Property Management page sets out what we cover, and Tenant Mix and Leasing and CAM and Percentage Rent go into the areas that most affect returns.

Contact us or request a free analysis to discuss your center.