A property management contract establishes an agency relationship between the manager and the owner. Considering that the management fee is often calculated as a percentage of gross income, this would seem to create an agency problem in that the agreement does not give managers the incentives to control operating expenses while they attempt to increase rental income. Though seldom the case, basing the property management fee on which of the following measures would, in theory, better align the interests of the owner and manager?

Question

Quizplus · Accepted Answer

The Net Operating Income (NOI) is the income generated by the property minus all operating expenses like taxes, maintenance, and repairs. The property management fee that is based on the NOI would encourage the manager to minimize expenses while maximizing rental income. This would result in the manager working to increase the value of the property, benefiting both the owner and the manager, and reducing the agency problem.

A Property Management Contract Establishes an Agency Relationship Between the Manager