NEW YORK CITY-The push for greater transparency in the real estate sector is finally making its way to the property management level. For investors and asset managers, understanding who is managing their properties and what systems and checks are in place is an issue of growing importance, and many are taking steps to ensure they have greater oversight for the sake of their properties' operational efficiency and returns.

Property managers provide a critical service to asset managers, handling the day-to-day operational activities that most asset managers simply do not have the capacity or capability to oversee themselves. Yet, frequently asset managers do not choose their own property managers. And often they enlist joint venture partners to do the job; however, these partners are usually brought on to a deal because of an existing relationship or reputation in a particular asset class – not property management credentials. In any case, operational due diligence has not been a consistent feature of real estate transactions. Now, however, there is a growing awareness that it should play more of a role.

In today's real estate landscape, the depth and breadth of property management evaluation practices are varied. Many asset managers have not yet made this a priority. For those that have, the starting point is generally a review of existing systems and controls and contract compliance with their property managers. These reviews are mainly information-gathering exercises, examining leasing processes, insurance policies and management fees, for example. More often than not, unfortunately, they reveal problems with tenant lease agreements (or lack thereof), cash management, and erroneous pass-through costs and fee calculations. This is especially true in real estate asset classes with high levels of transactional activity, like multi-family housing. On the controls side, standard practices dictate segregating property management duties to ensure stronger balances are in place and to reduce the risk of fraud. For example, the person that authorizes a disbursement should not also be cutting the check. All of these issues weaken the operational efficiency of the property and impose unnecessary costs on the asset manager.

More advanced practices include implementing measurement and analytics tools to further an asset manager's overall effectiveness and visibility into portfolio-level data. For example, a number of asset managers are beginning to introduce technology that will standardize and automate data reports that come from their property managers. Also, a few have developed scorecards to measure and compare property manager performance across their portfolios. Scorecards not only enable greater transparency with existing partners, but could also potentially affect future deal arrangements, particularly in cases where joint venture partners are selected to handle property management.

Finally, with increasing pressure from regulators and investors on improving transparency across all levels of the real estate sector, a leading practice of asset managers is to institute stricter operational due diligence on the front end of deal negotiations.

The reality is that many, if not most, asset managers still view operational due diligence and ongoing oversight as a cost rather than a possible benefit, or at a minimum, a necessary exercise. But even if they are not convinced that these extra measures significantly improve operational efficiency and cost management, there are potential unquantifiable benefits that should be weighed. In the current real estate environment, asset managers that appear to have more rigorous controls and transparency standards in place will likely become more competitive among investors, particularly institutional investors with a low appetite for risk. Also, these measures, especially fraud prevention mechanisms, could help mitigate reputational risk.

As the industry continues to grow and becomes increasingly more global, government, regulatory and investment demands continue to increase. The need for enhanced controls, oversight and reporting is becoming an even more critical factor in attracting capital and meeting the needs of both sponsors and investors alike.

Howard Roth is the global real estate leader and a partner in Ernst & Young LLP's Real Estate practice. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP, GlobeSt.com or Real Estate Forum. Josh Herrenkohl is the co-leader of EY's Real Estate Advisory Services group.

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Real Estate Transparency: Property Management's Turn

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