It took me an embarrassingly long time to figure out what people were talking about when they referred to a “Property Manager” or an “Asset Manager” of a REIT. So what is the difference, and why is it important?

A Property Manager typically will supervise, manage, and operate one of the REIT’s real estate properties on behalf of the REIT. The Property Manager is the party that is “on the ground” at the property, interacting with tenants and handling the day-to-day operational matters that arise. For example, if the REIT owns an apartment building, the duties of the Property Manager at that property may include some or all of the following: running the leasing office, entering into leases with tenants, preparing an operating budget for approval by the REIT, operating the property within the approved operating budget subject to permitted variances, hiring and training onsite staff, repairing and maintaining the property, ensuring the property’s compliance with applicable government regulations and permits, etc. The exact scope of property management activities performed by the Property Manager will be set forth in a Property Management Agreement. If the REIT has multiple real estate properties, each property may have a different Property Manager, though it is very common for a REIT to use the same Property Manager across many or all of its real estate properties. Depending on the structure, the REIT may not be the direct owner of the real estate property. For example, the direct owner may be an operating partnership or an LLC. In such a case, the Property Management Agreement typically will be between the direct owner and the Property Manager.

An Asset Manager, also called an Investment Advisor, typically will identify and recommend new investment opportunities to the REIT and evaluate and make recommendations regarding the existing investments of the REIT. An Asset Manager concerns itself with the overall investment position of the REIT. While a Property Manager will be focused on managing and operating a particular real estate property of the REIT in a profitable manner, an Asset Manager will be focused on managing and overseeing the REIT’s portfolio of real estate properties so as to be profitable to the REIT. The exact scope of asset management activities performed by the Asset Manager will be set forth in an Asset Management Agreement. While a REIT may have many Property Managers (one for each real estate property), a REIT typically will have only a single Asset Manager, as the focus of the Asset Manager is on the overall investment portfolio of the REIT. Not all REITs have an Asset Manager. A REIT with an Asset Manager is generally referred to as “externally managed.”

We will get into why the difference between a Property Manager and an Asset Manager is so important under the REIT rules. As a slight spoiler, an Asset Manager cannot qualify as an independent contractor because of its fiduciary duty to the REIT,¹ while it is often important that a Property Manager qualify as an independent contractor.

1. Rev. Rul. 74-471, 1974-2 CB 198.

Hello and welcome to my blog about being a partnership tax geek.

Here we will dish about all kinds of juicy topics related to subchapter K of the Internal Revenue Code of 1986, as amended.  Occasionally we will spice things up with forays into qualified opportunity funds, real estate investment trusts (REITs), unrelated business taxable income (UBTI), and more.

If that does not sound remotely interesting to you, run and run fast.  Things are about to get geeky around here!