Q: What does a PM’s percentage of gross income include?

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Q: What does a PM’s percentage of gross income include?

Q: What does a PM’s percentage of gross income include?

If the property manager is to receive 5% of the gross income, should that included property tax reimbursements from tenants, insurance refunds, repair reimbursements, utility refunds, interest income, etc.? The agreement states “5% of the monthly gross income.”

– Little Rock, ArkansasGross income and Property Managers

Thank you for writing. There are two things to look at here – the definition of gross income vs. gross rental income, and what it says in the agreement you signed. 

As you detect, there is a difference between the term gross rental income and the gross income of the property. The term gross rental income is restrictive to one type of income, where gross income is not restrictive at all. Indeed, it would refer to any type of income received from the property from whatever source. 

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The fact that you mention reimbursement seems to be significant: The practice of charging tenants separately for reimbursement of real estate taxes and insurance generates something called a pass-through  which is normally included in gross income. (Yes, that’s a District of Columbia exam, but the basics of accounting terminology don’t differ from state to state).

This arrangement seems to be more common in commercial leases, but I don’t see why the same concept can’t apply to residential leases – though it could take a lot more explaining.

P.S., don’t confuse a ‘pass through’ expense in a lease with ‘pass through income’ as in income that passes through an LLC or S-corporation to the owners’ personal income tax return. Those are different concepts.

What’s not included in your excerpt is the answer to this question: Gross income from what? I assume the contract can refer to gross income from the property, but you may look over the entirety of the contract to find contextual clues to establish that the contract refers to gross income from rental operations and collections. 

There’s another concept called gross operating income.  From a rental property, this is all the scheduled income, minus what you don’t get because of vacancies and credit loss, plus other income, such as vending and laundry machine income. At the end of the day, this isn’t too different from gross income from a rental property unless you’ve got some other things going on that are not really traditional rental activities. 

Something that might work in your favor in the event of a dispute: Who wrote the contract? Usually it’s the property management firm, rather than the landlord. Under the doctrine of adhesion, if there is any ambiguity in the terms of a contract, the courts will generally rule in the favor of the party that didn’t write the contract. 

This would be a comparatively weak argument, though, because property management contracts are not generally considered contracts of adhesion in the same sense that an insurance contract is. The more ‘take it or leave it’ a contract is, the more likely the courts will consider it a contract of adhesion. 

In the words of the former Attorney General of the State of Arkansas, “a contract of adhesion is a form contract submitted by one party and accepted by the other on the basis of this or nothing. It is an instrument devised by skilled legal talent for mass and standard-industrywide use which does not allow for idiosyncrasy. It is a transaction not negotiated but one which literally adheres for want of choice.”

So unless this was a mass-produced contract and you had no opportunity to make a counter-offer, I wouldn’t rely on the doctrine of adhesion to bail me out, though courts may still resolve doubt about contract terms in favor of the party that didn’t draft the document. 

Is this becoming a point of contention? The 5 percent of gross income figure, if applied mostly to rental income and vending income seems rather low.

If the other types of income are small compared to the income from rent, and your property manager is happy with that 5 percent figure, you may find that that’s a better deal than a 10 percent fee on a narrower definition of income. 

Author Bio
Writing about personal finance and investments since 1999, started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.
Author Bio for Jason Van Steenwyk

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