Real Estate Management Companies
A real estate management company is a separate operating entity that runs the properties an investor owns through other entities. It signs the management agreements, employs the superintendent and the leasing staff, contracts with vendors, collects rent, handles tenants, and earns a fee for doing so. The entities that hold title own the buildings and do little else. The division is deliberate: the risks that come from operating property, employment claims, contractor disputes, tenant complaints, and the mistakes of day-to-day management, sit in a company that owns no real estate, while the companies that own real estate have no employees and few contracts.
For an investor with one or two properties, a management company is usually more structure than the portfolio needs. For an investor with several buildings, staff, and a growing operation, it solves problems that the holding companies alone cannot: where the employees sit, who signs the vendor contracts, how the family is paid for running the business, and how a claim about management is kept away from the equity.
Milvidskiy Law Group P.C. forms real estate management companies, drafts the management agreements between them and the owning entities, and addresses the licensing, employment, and insurance questions that come with operating property for others.
Key Takeaways:
- A management company separates the operating risk of running property from the equity in the property. Employees, vendor contracts, and tenant relations belong to the manager; title belongs to the holding companies.
- Managing property for others is regulated. In New York and New Jersey, collecting rent or negotiating leases for another person for compensation falls within the definition of real estate brokerage, and whether a company that manages affiliated entities’ property needs a license depends on how the ownership and compensation are structured.
- The structure works only with real agreements and real separation: a written management agreement with each owning entity, a fee that is actually paid, separate accounts, and insurance that matches each entity’s role.
What a Management Company Does
- Operates the properties under a written management agreement with each owning entity: leasing, rent collection, maintenance, repairs, capital projects, and tenant communications.
- Employs the people. Superintendents, porters, leasing agents, and bookkeepers are employees of the management company, not of the owning entities, so payroll, workers’ compensation, and employment claims are in one place.
- Contracts with vendors for cleaning, landscaping, snow removal, repairs, and services, in its own name.
- Holds the operating accounts through which rent is collected and expenses paid, with net proceeds remitted to each owner, and holds tenant security deposits as state law requires.
- Earns a fee, typically a percentage of collected rent plus leasing and construction management fees, which is how the family that runs the business is compensated and how the operating entity is funded.
Why Investors Use One
Liability separation
Claims that arise from operations tend to name the operator. A slip-and-fall plaintiff sues the manager who failed to salt the walk as well as the owner; an employee sues the company that employed them; a contractor sues the company that signed the contract. When the manager is a separate entity with no equity, those claims are defended by the manager’s insurance and reach the manager’s modest assets, while the buildings sit in entities that were not the actor. The separation is not absolute, since an owner remains responsible for its property, but it changes who the defendant is and what the defendant owns. Separating management from ownership is one component of asset protection for real estate investors.
Operational clarity
A single operating entity centralizes payroll, vendor relationships, operating insurance, and management accounts. Each property-owning entity maintains its own records and a management agreement that defines the relationship. This division also makes the structure clearer to lenders, accountants, and prospective buyers.
Compensation and family involvement
Management fees are the mechanism by which the family members who run the business are paid for their work, separately from the return on the equity. That matters where one child runs the properties and the others are passive owners, and it matters in an estate plan that gives the operating child the management company and divides the owning entities among all the children. Business succession planning coordinates these management and ownership arrangements. The tax treatment of the fee income, including whether the management company should elect to be taxed as a corporation, is decided with your accountant.
Licensing: Managing Property for Others Is Regulated
Real estate brokerage licensing statutes are written broadly. New York’s Real Property Law defines a real estate broker to include a person who, for compensation, collects or offers to collect rent for the use of real estate, among other activities. New Jersey’s licensing act defines a broker to include one who, for a fee or commission, rents or negotiates the rental of real estate for others or collects rent for the use of real estate. A company that manages property owned by other people for a fee is generally within those definitions and needs a broker’s license or must operate under one.
Whether a management company that serves only affiliated entities, all owned by the same family, needs a license is a question of how the ownership and the compensation are structured, and the exemptions differ by state. Connecticut’s licensing law raises the same question and is reviewed the same way. We review the structure against each state’s statute before the company begins collecting rent, because operating without a required license can bar the company from collecting its fees and expose it to penalties.
The Management Agreement
A written agreement defines the relationship between the management company and each property-owning entity. It should address:
- Scope of authority. What the manager may do without the owner’s approval, such as ordinary repairs and leases on approved terms, and what requires consent, such as capital projects, leases above a threshold, and litigation.
- Fees. The management fee, leasing commissions, construction management fees, and reimbursable expenses, stated at rates a third party would charge.
- Accounts and reporting. Where rent is deposited, how security deposits are held, when net proceeds are remitted, and what monthly and annual reports the owner receives.
- Insurance and indemnity. Which entity carries which coverage, who is named as additional insured, and how claims arising from management are allocated.
- Term and termination. How either side ends the arrangement, which matters when a property is sold or when a lender requires a change of manager.
Affiliated entities should document and carry out their agreements as they would with unrelated parties. Written management agreements, invoices, and actual fee payments help establish that the companies operate separately.
Employees, Contractors, and Insurance
The management company is the employer. It registers for payroll taxes, carries workers’ compensation and disability coverage, follows wage and hour rules, and adopts the policies an employer needs. Superintendents who live on site raise their own questions about housing, hours, and the lease or occupancy agreement that covers the apartment. Vendors are engaged under written contracts with insurance and indemnity requirements. The management company carries general liability and, in most cases, errors and omissions coverage for its management activities, and each owning entity carries property and liability coverage for its building with the manager as an additional insured. The insurance program should be reviewed as a whole to identify potential gaps in coverage.
Where the Management Company Fits
The typical structure has three layers. Holding companies, one per property, own the real estate. A parent company, often an asset protection LLC formed in a state with strong charging-order protection, owns the holding companies. The management company, owned by the family members who run the business or by the parent, operates the properties under management agreements. Trusts may own the parent or the management company for estate planning. Proper business formation and ongoing administration keep the entities distinct: each has its own accounts, agreements, and filings.
Establishing Your Management Structure
- An assessment of whether a management company fits your portfolio, and how it should be owned and compensated within your structure and estate plan.
- Formation of the entity, its operating agreement, and registration in the states where it operates.
- Review of licensing requirements in each state and structuring of the company to comply.
- Management agreements with each owning entity, and the vendor contract, lease, and employment templates the company will use.
- Coordination of the insurance program across the management company and the owning entities.
- Integration with succession planning where one generation will run the business and another will own the properties.
- Ongoing maintenance of the entities and agreements through our Client Care Program.
When a Management Company Is Not the Right Tool
An investor with one or two properties and no employees gains little from a separate operating entity and takes on another set of filings, accounts, and agreements. A management company that would need a broker’s license the family does not hold, and that cannot be structured within an exemption, may be better replaced by a licensed third-party manager. And a management company that is formed but never used, with no agreement, no fee, and no separate operations, provides no separation at all. In those situations we recommend the simpler structure.
Discuss Your Property Management Structure
If your portfolio includes employees, multiple vendors, or centralized management, we can assess whether a separate management company is appropriate. Bring your entity documents, current management arrangements, and insurance information. Our attorneys practice in New York, New Jersey, and Connecticut. Contact Milvidskiy Law Group P.C. to schedule a consultation.
This page is provided for general informational purposes only and does not constitute legal advice. Laws differ by state and change over time. For advice about your situation, consult a qualified attorney.
Frequently Asked Questions
What is a real estate management company?
A separate operating entity that runs the properties an investor owns through other entities. It signs management agreements with each owning entity, employs the staff, contracts with vendors, collects rent, and earns a management fee. The entities that hold title own the buildings and do little else.
Why separate management from ownership?
Claims that arise from operations, such as employment claims, contractor disputes, and injuries blamed on maintenance, tend to name the operator. When the operator is a separate entity with no equity, those claims are defended by its insurance and reach its modest assets rather than the buildings. The separation also gives the business one payroll, one vendor program, and one set of operating books.
Do I need a broker's license to manage my own family's properties?
It depends on the state and the structure. New York and New Jersey define real estate brokerage to include collecting rent or negotiating leases for others for compensation, so a company that manages property owned by other entities for a fee is generally within the definition unless an exemption applies. Whether a company serving only affiliated entities qualifies for an exemption turns on how ownership and compensation are arranged, and we review that before the company begins collecting rent.
Who should own the management company?
Often the family members who run the business, so that management fees compensate them for their work separately from the return on equity held by passive owners. In other structures the parent holding company owns it. The choice depends on the succession plan and on the licensing analysis.
How should management fees between related entities be handled?
Fees should be documented in a written agreement with each property-owning entity, set at rates a third-party manager would charge, invoiced, and paid. These practices help establish that the management company operates separately from the property owners.
Who employs the superintendent and the staff?
The management company. It registers for payroll taxes, carries workers’ compensation and disability coverage, and adopts the policies an employer needs. On-site staff raise additional questions about housing and hours that are addressed in the employment and occupancy documents.
How is the insurance arranged?
The management company carries general liability and usually errors and omissions coverage for its management activities. Each owning entity carries property and liability coverage for its building with the manager as an additional insured. The management agreement allocates claims between them, and the program is designed as a whole so that no claim falls between policies.
How is the management company taxed?
Its fee income is ordinary business income. Whether it should be a disregarded entity, a partnership, or elect to be taxed as an S corporation depends on who owns it and how they are compensated, and is decided with your accountant.
Does a small portfolio need one?
Usually not. An investor with one or two properties and no employees gains little from a separate operating entity and takes on another set of filings, accounts, and agreements. The management company earns its place when there are employees, multiple vendors, and enough properties that operations have become a business of their own.
