There is an old adage that claims, "The more things change, the more they stay the same," and that is not a happy thought for a board of directors or an association looking to change property management firms. The turmoil of replacing a management company is guaranteed to be costly, not only for the board, but for the entire community. So make sure the necessary changes are achieved through this change in management.
Since board members are generally volunteers, merely making such a decision could be problematic. Is there a formula to guarantee a successful change? Are there guidelines to ensure a move in the right direction? What information should a prospective management company provide before the contracts are signed? What is the best way to spot a red flag? Where does the search process begin?
Begin at the Beginning
When a management change becomes imminent, the best place to start a Q&A exchange is right at home with the board. Each board member must understand the problems with the current firm and what changes are expected. First, ask if the problem represents a personality conflict with the manager? If a different manager, within the same company, better communicate and work with the board, change could be accomplished quickly and seamlessly by switching out the manager alone.
Asking who, what, when, where, and why—the five “W’s”—can identify if the problem is deeper than a single management person. By identifying the areas where problems have occurred and the individuals involved, a board can develop a better idea of what is working and what must change.
It’s a good idea to have an attorney review the current contract early in the information-gathering process to determine the best way to legally separate from the property management company, and to identify areas for positive legal change. When a decision is made on a new management firm, the attorney should again be consulted for a review of the new contract and documents before anything is signed; hopefully, there will be a lot of due diligence in between these two reviews. Spending sufficient time on the search is the only way to determine the overall best course of action for a community. While board members may argue the expense of involving an attorney, legal counsel can spot more costly pitfalls.
Work the Details
David Baron is president of Metro Management Development, Inc. in New York City. His firm manages co-ops, apartments, and condos, including Mitchell-Lama properties. He is direct with any board looking to change management firms. “Check internal controls, after hour’s protocol, and additional fees that may be assessed beyond the base fee,” he says. He recommends a board go further than the usual reference check and speak with auditors and attorneys who service the condo and co-op industry to find a good fit for specific property needs. “Due diligence and background checks require time and effort.”
Andy Ashwal, executive director of KW Property Management & Consulting in New York City, typically has a few questions of his own for boards and associations looking to make management changes. “What do you like about your current property management firm and what would you like to improve?” he asks.
Education goes both ways with this approach and it may help define goals and expectations. Ashwal expects a board to ask a prospective firm about any affiliation with other companies, accounting, and preventive maintenance. When a firm has a financial interest in other companies and vendors, there can be conflicts of interest.
Other boards may prefer this type of arrangement and view it as a savings of time, dollars, and effort. It is an individual board preference, but should be transparent. “Accounting,” states Ashwal, “is the lifeblood of a business. An accrual system gives a more accurate picture than cash based systems.”
A board should ask who keeps the books—an accountant or a CPA—and what layers of checks-and-balances are in place. Other important questions he recommends asking pertain to certification and assisting in and/or passing an audit, and he would expect companywide standards for preventive maintenance programs. He would like to know if a prospective firm has easily accessible templates and a repository of forms in a company “tool box” to prevent re-inventing the wheel for every issue.
Ashwal would also encourage a board to inquire about the number of additional properties their manager is assigned, and if that number increases, would there be any notification. “Will there be scheduled office hours for our property manager, and will those hours be on site?” is another question he would ask. For a board with goals of improved customer service, these are important questions.
If an association opts to hire a portfolio management firm, the property manager may have to oversee numerous properties, limiting the on-site time and attention available for your community. Don’t assume, ask! Property management firms are as varied as the properties they manage. Deciding what services a community expects to pay for is part of the overall selection process. When the board or committee has established expectations from a new firm, the budget can define what is affordable and possible.
Ashwal acknowledges there are numerous reasons for changing management, but a board should never forget it is a business with employees, customers, and budget. He advises a detailed business plan to help guide a board reaching goals and expectations.
Kenneth M. Morrison, president of Manhattan-based Lemor Realty Corporation, believes fiscal responsibility is the number one requirement for a property management firm. Another area on which he suggests focus involves state, city and federal laws/restrictions, also called “asset management.” If a management firm fails to prevent violations and fines, when laws and regulations change, a property’s assets greatly diminish. A quality property management firm will keep the board apprised when changes require corrective action. Morrison would expect and encourage good communication between the board and the manager on all issues to keep everything personal and timely.
Attorney Martin S. Kera, a principal with Kera & Graubard and Bren Management Corporation, has three decades of experience with all aspects of property management. In his experience, the interview process with a new management firm starts with reasons the property is seeking. Usual replies range from “the agent is non-responsive to our request,” and “we don’t get financial statements,” or “management fees were increased,” and “our agent went out of business,” or even worse, “embezzled our funds.”
Just about everyone asks, “How many buildings do you manage, and how many people do you have on staff?” Boards want to know if an agent will be assigned to the property and how many times they will visit, inspect, and perform functions such as bookkeeping, and/or supply reports.
“I like to think a little bit more out of the box,” says Carl Bornstein, a property manager with Veritas Property Management in New York City. “Organization, follow-up, and responsiveness are the most important things in a management company.”
After the initial interview, Kera suggests, call the person assigned to your account and see how quickly they respond. Do you have to deal with excessive voice mail or menu prompts? The larger firms often have different agents assigned to different duties—one writes checks, others deal with construction or monthly payments. The board should decide whether they want to deal with this arrangement on a regular basis.
“A small management company has everyone servicing all the accounts—that may better serve your interest…the number one concern of most residents and board members is how fast their managing agent responds to their emails or phone calls and building needs, “states Kera.
Red Flags and Deal Breakers
When proper due diligence is finished, and details are fully explored, the experts all recommend a few additional questions to prevent buyer’s remorse or unwelcome surprises. Two important areas Kera finds overlooked by boards are construction and closing procedures. Closings and mortgage refinances are a big issue. When you refinance, the banks have questionnaires and agents who respond slowly, while charging an additional fee, are frustrating. “The board should also ask how the managing agent handles major construction projects and routine projects.”
“The one thing that stands out is anyone who ‘yeses’ you to death on every question. To me, that’s a red flag,” says Bornstein. “You are telling me that anything that they ask for or anything that they want, the answer is ‘yes.’ That’s not reality.”
Morrison recommends questions concerning the management of union staff, if relevant. “Is there a key person to deal with the changes as they develop?” Ashwal would suggest additional questions if the management company expects to be a signer on the bank accounts or shies away from any suggestion of a third party audit. Both are potential red flags.
Along those same lines, Baron would want to know if co-mingling of funds among properties is a common practice, or if all buildings “stand alone.”
Finally, before anyone signs on the bottom line, it’s imperative to have an attorney review all documents and proposals one last time for any errors or oversights. If the hiring committee and/or the board have taken sufficient time and effort, hopefully it will be a long while before another change is necessary.
Anne Childers is a freelance writer and a frequent contributor to The Cooperator.