In a push to develop new sources of revenue, big property management companies in Los Angeles are diversifying into all kinds of tenant services from Internet access to cable TV and laundry services.
Previously, such services were typically contracted out to third-party vendors, and these decisions were left up to each individual apartment building’s on-site manager. But increasingly, big national property management firms with multiple buildings of 100 units or more are bringing such services in-house, or acting as the exclusive broker with outside service providers.
By centralizing tenant-services decisions, the property manager can offer the vendor a much larger contract, and thereby negotiate much more favorable terms. And in cases where the property management firm directly offers such services, it creates a new revenue stream that didn’t exist before.
“The system (of directly providing services) also allows us to better manage our relationships with renters, which reduces tenant turnover and trims our costs,” said David Nagel, president of Decron Management, a privately held Van Nuys-based management company.
Nagel said that Decron negotiates contracts with local cable TV services for access to the company’s 2,000 apartment units throughout Los Angeles County. The company has a similar program involving on-site laundry services.
If the nascent trend continues, it could render obsolete the traditional system under which vendors negotiate separate deals with individual building managers and renters, according to industry executives.
Hit or miss
The strategy is far from foolproof, however.
“Putting these services under one roof can become hit-or-miss and unprofitable due to the amount of time and attention they require,” noted Vickie Friedman, director of manufactured housing and residential management for Watt Management Co., based in Santa Monica. Watt manages some 600 apartment units in L.A. County and several hundred more in San Diego.
Executing the strategy successfully, Friedman said, requires good salespeople who can negotiate the right deals for a bundle of different services that will generate income. And the sales effort doesn’t stop there, either. Tenants also have to be convinced in sufficient numbers to make the deal worthwhile, and accomplishing that can be a challenge. Then there are the federal telecommunications laws, which restrict certain types of exclusive contracts between vendors and brokers.
For this reason, Watt passed on a few opportunities to enter the entrepreneurial tenant services market, and other companies have been equally as cautious.
While the most aggressive pushes into tenant services are being undertaken by the large national property managers, many of the smaller regional companies remain skeptical and cautious.
There is a reason behind the big companies’ aggressiveness, the recent enactment of federal tax legislation that lifted pre-existing legal barriers, primarily for the large real estate investment trusts, many of which have significant holdings in multifamily properties. Previously, REITs were restricted by the tax code from creating for-profit subsidiaries.
But those restrictions were eased as of Jan. 1, thanks to provisions of the Work Incentives Improvement Act of 1999 that just became effective.
“Basically, the law eliminates the competitive disadvantage that’s stymied REITs for several years,” said Jay Hyde, a spokesman for the National Association of Real Estate Investment Trusts in Washington, D.C. By having the means to raise additional cash, REITs can attract investors and increase shareholder value, Hyde said.
REITs could use a break. They’re coming off a difficult three years. Their aggregate growth rate in total income and asset values, according to the National Association of Real Estate Investment Trusts, has fluctuated wildly. In 1998 and 1999, the value of REITs, according to NAREIT’s key composite index, fell 18.9 percent and 6.48 percent, respectively.
But even before the law’s enactment, property management firms were sizing up the profit potential that lay in many already existing services.
NAREIT said it’s much too soon to determine the economic impact of the law. However, an industry survey released in December by PricewaterhouseCoopers in New York showed that 80 percent of the nation’s REITs surveyed plan to set up a taxable subsidiary under the new law.
Economies of scale
Some firms are anticipating sizable revenue streams, and profits, to be generated from their new tenant services subsidiaries. Understandably, they’re eagerly gearing up to capitalize on the newfound opportunity.
Equity Residential Trust, a large Chicago-based REIT that owns about 3,300 residential units, including Park West in Westchester, recently struck a deal with five other large REITs: AvalonBay Communities, based in Alexandria, Va.; Camden Residential Properties of Houston; AMLI Residential Properties Trust, Chicago; Charles E. Smith Residential Realty, Crystal City, Va.; and Gables Residential, Atlanta. In addition to Equity Residential Trust, both Avalon and Camden have residential holdings in Southern California.
The deal involves the consortium of REITs offering tenants, who live in about 450,000 units around the country, customized Internet services that include more than the conventional e-mailing and e-tailing features.
The system being considered would operate on a national level and would allow tenants to make monthly rental payments, deal with renters’ and auto insurance claims, and receive frequent Web-user discounts on consumer products and future home purchases.
“The system will even let you order pizza delivered to your apartment the possibilities are infinite,” said Cindy McHugh, an Equity Residential spokeswoman.
Local and national Web companies will be charged a negotiated rate for access to the enormous population of tenants, thereby creating a revenue stream sufficient for the REITs to cover their operating costs and generate a positive cash flow.
“It’s all about achieving economies of scale and generating an income from it,” McHugh said.
