The Hiring Process: Sizing Up Management

For months, the situation at the Hartsdale co-op had been growing increasingly untenable. The new property management company, which had been brought in with much fanfare, was falling down on the job. First, there was the problem of the habitually late monthly statements. They were supposed to be in the board's office by the 14th of every month - but they weren't arriving until the 20th, or sometimes as late at the 26th. For the cash-strapped building, this was an impossible situation. Without knowing when the statements would arrive, the board couldn't plan what needed to be done financially and physically. Then, it was discovered that the company had been ignoring the board's instructions on how and when to pay the bills.

"This was a co-op that was self-escrowing for taxes, and the managing agent was using the money to pay bills. And, all of a sudden, the board realized they were short," recalls the property's attorney, James Glatthaar, a partner at Bleakely Platt & Schmidt "They didn't have enough money to pay real estate taxes without taking a sizable chunk out of the reserve fund." The board dug into its reserves to pay the taxes. By the following year, the management company had been replaced.

How did the co-op end up hiring this particular company? Answer: the directors had made the classic mistake. They had warmed immediately to the company's representative during the interview and then failed to ask crucial questions.

"The board truly didn't know what it was looking for in a managing agent," Glatthaar notes. "And they ended up getting talked into hiring a company that provided services they didn't need, and was weak on providing services they did need. This is why it is very important to do research up front." In short, the building's board failed to ask, "What is the company's skill set, and is it a good match for us?"

Another co-op's story is equally instructive. The directors at an Elmhurst co-op had recently ended a 40-year tenure with a federally subsidized mortgage and needed a management company that could provide a firm hand in directing the building toward financial independence [and] "give us some insight and point us in a direction, rather than us pointing them in a direction," as the board treasurer, Allyn Weinerman puts it.

A hiring committee was formed. It called in only one company. Based on the presentation by that firm's representative, the committee recommended the manager. The full board interviewed the representative, called a few buildings to check how those were managed, and made its decision. The firm, the sole one to be called in, was hired. The process took about two months.

"We brought them in. We questioned them. They told us their background. We did some due diligence," reports the treasurer. "We were impressed and we stopped" looking. The board didn't see the need for the company representative to tour its building, and didn't ask whether the firm's principals had the mandatory broker's license. "I don't think the question was necessary." The company was very well known, the firm's representative seemed very knowledgeable and "if we have problems, we'll just change again," maintains Weinerman.

Such statements and actions would seem surprising if they weren't so typical. Every year, hundreds of co-ops go looking for new property managers. They think they are being diligent. They think they are doing their jobs. Yet the relationship doesn't work out. What are they doing wrong? Some say it begins in the interview process.

WHAT YOU NEED

There isn't a surefire way to protect your building from the wrong management company. But getting to "yes" with the right firm can be achieved through a thoughtful and thorough approach at finding out as much as possible about the companies being considered.

"There really is no way to bulletproof yourself, but you can take smart steps to minimize the risk of a bad hire," observes Glatthaar. "The first thing a building should do is identify its needs. If their biggest need is prompt and effective communication between the managing agent and the shareholders or the managing agent and the staff, then the board should look for an agent who will do that. If the board's concerns are predominantly financial...they should interview the president of the management company and their financial people...and try to satisfy themselves that this group can handle the building's financial issues well."

Then too, boards should think about the unique attributes of their buildings. If a property is old and has a lot that needs to be fixed, it needs a managing agent who can work with an old building and manage construction projects. If the structure is in good condition but has a difficult staff, the board should get an agent who knows how to deal with employees.

"Develop a system," says Herb Cooper-Levy, a former director of the National Association of Housing Cooperatives and a co-op consultant. "Have conversations in advance of a selection process, and then be sure to get that information about those things. Written information is better than verbal information. There ought to be some place in the proposal for the signature where the managing agent certifies the accuracy of the information being provided." If a management company balks at certifying the information, then that isn't the company for you.

QUESTION TIME

The boards that are the most successful in hiring a property management company are those that have thought about the factors of greatest important to the co-op and have developed a common rating system. By doing that, the board can tally its findings and arrive at a more reasoned decision. "It gets things out of the personal level," points out Cooper-Levy. Although a board has to decide on what kinds of questions make sense for its particular building, some of the areas to consider include:

Firm reputation. How do past and current clients feel about the firm? Are the principals involved in the management?

Accounting procedures. How does the firm manage payroll and collections? How does it bill monthly statements? Does it file tax returns in a timely manner? Notes Glatthaar: "Every building should want to know that their managing agent has the ability to keep track of their assets and should be able to explain within 24 hours entries to their monthly reports and the status of the board's reserve fund."

That's the lesson a 76-unit co-op in Hartsdale learned, after a painful trial period with a management company that didn't fit its needs. After the first year of repeated late monthly statements, the board gave the agent a list of issues it wanted addressed. Every three months after that, the directors brought out the list and tried to get an update from the agent on how he was progressing. "And the reality was the agent was not progressing at all. And finally, the board terminated the agent and replaced them with another agent who has done a much better job," reports Glatthaar.

Oversight. How often does the property manager visit the building? Is he on a regular schedule? Does he call for meetings offsite as well as onsite? Does he attend board meetings when asked?

Insurance. Does the firm have adequate insurance? Anita Sapirman, president of Saparn Realty, reports that management companies should have three types: errors and omissions insurance, liability insurance, and a fidelity bond, which covers the principals and the employees in the firm.

Licensing/certification. There is no management license per se, but the law requires that the principal of a firm have a broker's license. Does he or she have one? Education certifications are not required, but should certainly be considered a plus. The Institute of Real Estate Management offers the Certified Property Manager designation, the Associated Builders and Owners of Greater New York has a Registered Apartment Managers degree, and the Community Associations Institute presents the Professional Community Associations Manager certification.

Experience. What is the experience level of the person who will actually be handling your property? Does the agent understand how to oversee capital projects? Does he understand the basics, like the need for a building permit? Can he deal with such issues as lead paint abatement? "You want to interview the site manager," says attorney James Samson, a partner with Bangser Klein Rocca & Blum. "You want to interview the [person] who is going to be talking with shareholders, interfacing with the staff. What you really want to hear is what will the property manager do in a problem typical for your building?"

Back office. How big is the back office? What kind of backup is offered when the property manager is unavailable? "Boards sometimes make the mistake of focusing in on a person, either the site manager or the president of the company, and think that they are hiring this person, when in fact they are hiring a company," notes Glatthaar. "And, a lot of times, the company doesn't have the talent below the level of the person they think they are hiring."

Resources. Does the firm have an engineering department that it can use as a resource? Can it assist in obtaining loans for the co-op at competitive prices? Does it have managers who are financially savvy?

Responsiveness. Does the firm exhibit concern for the board and shareholders? Does it take pride in working to run a well-maintained building?

Innovation. Does the firm have ideas for regularly scheduled improvements?

Price. What is its annual fee? How do they arrive at it? What are considered extras? How does the fee fit into the co-op's budget?

Indictments. Has the firm or any of its principals ever been indicted or investigated for corruption?

For some co-ops, however, the idea of asking a representative from a property management firm whether he or she has ever been charged with a crime is simply unthinkable. Take, for example, the luxury co-op on the Upper East Side, which, even after having gone through an embezzlement scandal years before, hired a new management company this year without asking the most pertinent question, given the building's history: "Have you or anyone in your firm ever been indicted or convicted of a crime?" The board didn't even contact the Manhattan District Attorney's office, which provides a list of all the companies and individuals who have been indicted since 1994.

Then there's the co-op on the Upper West Side, which did ask the question of a candidate. Although it got an affirmative answer - the company's principals had been convicted and the firm had been in receivership for the past 10 years - it still hired the company

THE RIGHT STUFF

Of course, there are those who do get it right. When the directors at 154 West 18th Street went looking for a new property manager this past year, the board was aggressive. After collecting recommendations from friends, staff, and the building's attorney and accountant, it screened the companies on the phone.

The firms that passed the first hurdle then received a written questionnaire, asking for more details about their practices. Then the top contenders were invited to an interview, where a host of topics were covered: specific projects the candidate companies had worked on, dealings with problematic shareholders, whether they had been involved in any lawsuits, and how the accounts were kept.

Finally, the board asked whether any of the company's principals or employees had been indicted or convicted of a crime. "We asked directly. We didn't pull any punches, given that these people are going to be affecting our lives on a day-to-day basis," asserts Errol Antzis, the president.

He believes that the board, in being forthright, was dealt with in a forthright manner. None of the candidates reported any major lawsuits in the past five years, though some said they had had minor suits from shareholders. "Everyone we interviewed was very professional, very open. We never got the impression that anyone was hiding anything or was evasive in any way."

After the interviews, the directors followed up on the references, while a couple of members did additional research, going online to check out the candidate companies. After checking references and the companies' offices and the buildings they managed, the board decided. Given the board's professional make-up - investment bankers, architects, nonprofit trustees - "we tend to be fairly organized, fairly thorough in the way we conduct our business," reports Antzis.

Another board that did it right was the one at 256 West 21st Street. For these directors, the key traits they were looking for in a new agent were responsiveness and competitiveness. They wanted a company that could solicit more competitive contracts from vendors, thus saving the building more money, and get work done in a timely fashion. With only a part-time super and a small management company providing oversight, some day-to-day quality-of-life issues were getting lost in the shuffle.

"We had a small project to move Time Warner cabling from outside the wall to inside the wall. It took constant reminders over two years before the work was completed," reports the board president, Patrick Spearing. In another instance, the board asked for bike racks to be installed. That job took from June 1998 to January 1999 to be completed.

In looking for a new property manager, the board went online at www.habitatmag.com, gathering a list of thirty companies to e-mail for preliminary proposals. Of the eleven that responded, the board culled information and called three to interview. Spearing describes the interviews as mostly "unstructured," with questions including: how long a company had been in business, procedures for contracting work, and the kinds of discounts that could be negotiated. Other queries ranged from whether the property manager was accessible by e-mail to how many other buildings the firm managed and how responsive it was to shareholder problems. The board wanted to know other things, too, such as what experience it had managing part-time employees and could its agents communicate with someone whose first language was not English?

After about three months, the board made its decision. The directors are very happy with their choice, reports Spearing. They stayed within their price range and feel their building is being better cared for.

In the end, boards have to learn to ask the tough questions and the right questions. Sometimes they don't because the candidate they are interviewing intimidates them, or they don't know what they should be looking for. Sometimes they are afraid of confrontation and don't want to say something that the agent is going to want to take as an insult.

"For some boards, it's just not on their radar," says Cooper-Levy. "Other boards are just too polite to ask the hard questions and it's one situation where being a nice guy doesn't work. For God's sake, if they had been convicted that would be a pretty big flag to me that that would not be a firm that you would want to deal with. Any firm whose practices were so lax to make it possible for an individual to siphon funds is not a firm you should be wanting to deal with."

All this leads to boards stepping too gingerly around the candidate, either deliberately, or accidentally, which can lead to multiple headaches down the road. So how can boards avoid the pitfall of politeness? Says Cooper-Levy: "This is the most important contract that the board is going to make. They don't appreciate they are in the driver's seat and the quality of the journey depends on how the vehicle is driven."