Filling the Bill How Managers Determine Fees

Filling the Bill

For most boards, the fees charged by their management firms are just a fact of doing business. Aside from signing the initial contract, most board members probably do not give much thought to how those fees were initially determined, beyond the usual comparison-shopping that goes on when choosing a firm. Perhaps a bit more scrutiny is applied to determining the annual increases within the contract, but still, the fee formula may seem closer to a financial alchemy rather than an exact science transparent to all.

The truth is, although most management firms take the same factors into consideration when determining a fee structure, each company is different. Each offers its own brand of experience and expertise, its own way of doing business and serving its clients. Pinning down the source and trajectory of management fees is a far cry from predicting, say, the price of oil.

A large part of that unpredictability stems from the fact that not only is every management firm different, so is each building. A ten-unit co-op on the Upper East Side stands as a wholly different animal from a 200-unit high-rise in Battery Park. So with all these variables in play, how does a management company determine how much it will charge, and most important of all, how can a building know if they’re getting the right kind of deal for their needs?

Starting With the Basics

The first thing to remember about the determination of fees is that nearly every management firm offers the same basic set of services regardless of building size. Variables include the option of having a manager on-site either full-time or for a set amount of hours per week; backroom services such as bookkeeping, bill paying and other financial tasks; and operations management such as staff management and oversight of repairs and maintenance. That said, differences between building communities are weighed differently by different management companies. Obviously, if a building requires a 40-hour-a-week, on-site manager, then the fee is going to be higher than a building that only needs for the manager to show up once or twice a week.

“When we have the opportunity to pitch an account,” says Dan Wollman of Gumley-Haft Real Estate, “the first thing we do is look at the size of the building, number of units, and the location before we even propose a price. We do a walk-through to determine approximately how many hours we’ll have to spend on the property on a weekly basis, and then try to figure out who would be the best manager to be assigned to that project. We look at the amount of work the building requires, the amount of hours we’ll have to spend, and we also have to look at what it’s going to cost us to maintain that account.”

This comes into play even in smaller buildings. While it may seem like smaller buildings always will pay lower rates, it’s important to remember that the fees for the specific management services will not be lower. Doing the books for a small building will cost the same as it will per unit for a larger building. The cost difference comes in multiplying those per-unit prices.

In general, says Sam Irlander, president of Manhattan-based Parker Madison Partners, Inc., there are three basic ways that a management company and board will agree to set fees. First, management might take a percentage of the annual operation budget, comprised of maintenance fees in co-ops and common charges in condos. Second, they may agree to a flat fee derived from the number of services provided. Third, they may negotiate a figure based on how much they will need to manage the property overall, choosing a dollar figure per unit per year. This third option usually takes place in smaller buildings.

Again, the fees are based on the overall services required by the building. “It depends on the criteria of the board,” says Anita Sapirman, president of Saparn Realty, Inc. in Manhattan. “We base our fee structure on the size and nature of the building and the demands of that particular account. Each housing company is unique in its own nature. Each has its own needs.”

Mona Shyman, vice president of the Federation of New York Housing Cooperatives and Condominiums (FNYHC) and a co-op and condo management consultant, agrees. “It all depends on the needs,” she says. “Usually, a company provides the building with a manager on-site. That can be anywhere from three hours a week to full time. Some buildings also require a secretary to work with the manager. Some managers work on portfolio, going from building to building. The needs will really determine the fee.”

And that means that there’s no set-in-stone formula for determining the annual cost of running a co-op or condo building. According to Michael Wolfe of Midboro Management in Manhattan, “As far as I’m concerned there’s no direct answer for calculating. I think you take a lot of variables in to account and then you make a decision based on that. [It might be] really unfair for both parties to use a direct calculation based on number of units. I look at [services.] If our agent goes to 12 board meetings a year, I have to compensate that agent. If that agent carries less of a load, or if the building needs any capital improvements, it all comes into play. If a building doesn’t need any capital improvements and you’re taking over because the old agent just didn’t return phone calls, the next few years [in that building] may be a management cakewalk, aside from the day-to-day operations. If the building is a mess or has an infrastructure nightmare, I might suggest to a board that we’d charge additional fees during the phasing-in period that can then be cut back.”

It’s in the Details

Beyond these basic building blocks, other factors also can play into deciding on a final cost structure. The size and scale of the building is certainly the biggest variable in this equation. “I need not tell you that everyone would rather handle Park Avenue buildings with bigger fees and bigger names,” Irlander says. The reason, of course, is that providing certain services such as managing the books may take the same amount of effort, but if the fee structure is based on a per unit amount, then obviously the financial reward will be greater.

Irlander says that there can be advantages to smaller buildings. “Nothing is too small, and nothing is too big for us,” he says. “People tend to want to run larger buildings because they may feel they’re being compensated more adequately.” On the other hand, smaller buildings with fewer residents and more manageable operations systems “can mean fewer problems than bigger buildings.”

The physical status of a building can factor into the fees as well. “We don’t charge extra for overseeing major capital improvement programs,” Sapirman says. However, “if a building is in perfect shape, we factor that into a lesser fee structure because we know we won’t be spending time on those major projects.”

Another factor might be personnel—an individual on-site manager might garner a higher fee than another, meaning that a board’s personal preference might factor into cost. “If it’s a board that’s not in awe of a management company, they’ll often interview the potential managers who are going to be on site,” Shyman says.

How Things Change

As with all matters of money, management fees will change over time. Contracts between boards and management firms are usually set for a year, Shyman says. “And there’s usually a clause stating that it can be cancelled with 30 or 60 days’ notice.”

When the contract is set to expire, the board and management team will meet to renegotiate the fees for the coming year. “Normally, there will be a cost of living increase,” Sapirman says. “Or if we feel the demands [of that particular job] have changed, then we will make an evaluation and determine a new fee with the board.”

“Everyone’s costs go up,” Irlander says. “As expenses increase, management fees should increase as well. It would not be unlikely to give a manager a percentage increase similar to any increases in operating costs.” If the income from maintenance fees increases five percent, then management would probably get a five percent increase, too.

Irlander adds that increases “should be based on performance. There should be a risk-reward system.” Incentives to perform ultimately can prove beneficial to the board, the building and the management.

Getting the Most from Management

Once all the fees are set and a working relationship is established, how does a board know if they are getting the most for their money? The reality, Shyman says, “is that you can’t really know.” Many boards are comprised of residents without much experience in management and everyone will look at things differently because of that inexperience. In some cases, it almost comes down to a matter of luck, she says.

Irlander believes that a few very simple rules of thumb exist for judging quality. “Are you happy with who you have?” he says. “Have you been handed off? Are the people who came to sell you their services the same people who are visible every day?”

It is important to ask the folks who are working day-to-day with the management firm what their thoughts are, too. “Look at your staff and see if they’re happy with that they’re getting,” Irlander says. “Is it a laissez-faire approach or is the company taking a hands-on approach? Are you seeing improvements?”

Analyze the financial services being given as well, and ensure your investment is being handled properly. And do not forget the basics when it comes to determining the quality of a management firm. “You should be looking at licensed companies and managers with certifications,” Sapirman says. “There should be timely and accurate reporting.” It is vital for the board to remember that “they have fiduciary responsibilities to make sure that the agent is doing his or her job.”

As with anything, proper communication, good oversight and a willingness to be flexible—both on the part of the board and management—will lead to a good, solid working relationship, one that could last years. And a long-term relationship between board and management built on trust and mutual understanding ultimately means a bright future for not only for the building but for the people who live there.

Liz Lent is a freelance writer and a frequent contributor to The Cooperator.

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