Taking Care Of Business

Alvin Wasserman is director of Fairfield Property Services.

There are two principal ways properties are managed – one is proactive and the other reactive. Business schools refer to these methods as “Management by Objective,” as opposed to “Management by Emergency.” Boards can gauge how their property is managed by meetings with their property manager, observing tangible results, and reviewing the monthly management report. The following are three actual examples of how things can go wrong when the board does not receive the information it needs to keep track of the property’s operations.

The first scenario involves newly constructed homes, legally organized as a homeowners association with two condominium sections. Initially, the board was in a minority position under the control of the builder and the management company. The management company was sole signatory on checks to pay invoices. The homeowner board members sensed something was wrong, but they could not verify their suspicions since they were not getting a management report that would provide the information needed to monitor their property operations. When the homeowners took control of the board, a new management firm was hired and the nightmare came into the light of day.

The homeowners-association owners were billed from the beginning. Condominium Section 1 was billed but Condominium Section 2 was never billed. Bank accounts were not opened for the condominium sections and payments were not posted. All invoices were being paid from homeowners-association funds. The homeowners association’s income and expenses were commingled with the condominium sections.

Billing was skipped for two random months within the first year and a half. Some of the homeowners’ monthly common-charges checks, amounting to thousands of dollars, were not deposited for as long as a year. Some common-charges checks were so old they were unusable. An accounting firm was hired to conduct a forensic audit. The builder paid an attorney and the accounting firm to set things straight, acknowledging the previous management company’s deficiencies.

How Do You Do It?

How can boards and owners know their investment in their homes and assets is managed professionally? The monthly report provided by a management company is a guide to the quality of service provided. In any given month, the management report summarizes all of the financial and maintenance services provided to a property by a management company. The point of interaction between boards, the properties they represent, and the management company is the property manager. The culmination of the property manager’s efforts on a monthly basis is the management report.

The second scenario is that of a condominium that switched management companies three times within a three-year period. The management companies were sole signatories on checks to pay invoices. The last two management companies did not maintain records, a general ledger did not exist, and there was no backup for income and expenses. The audit trail was lost. The board knew something was wrong but could not identify the problems because the management report was inadequate.

Maintaining accurate records is of the utmost importance to document financial activities at a property. Quality record-keeping includes the following components:

Accounts payable files, segregated by vendor to include a purchase requisition, invoice, signed delivery receipt, and backup copy of the check for every payment.

Accounts receivable data, updated daily via a wide area network connected to the bank.

Accurate cash balances, available at all times.

Individual unit files, established to contain every correspondence and transaction with residents.

Record-Keepers

A management company needs to keep accurate records to service a property. Records provide historical data essential to property maintenance. They also provide a log of work orders, legal matters, and correspondence between the board, the management company, and unit-owners. The way files are maintained for unit-owners, accounts payable, and accounts receivable is crucial to help managers carry out their assignments. The management report is a reflection of the way the management company maintains records. Nonetheless, there is no substitute for a board’s visit to the management office that provides the picture worth more than a thousand words.

The third scenario is of a cooperative with a sponsor who held 45 percent of the property’s unsold shares. The management company was sole signatory on checks to pay invoices. When the sponsor sold the unsold shares to a reputable investment group that brought in new management, it immediately became apparent that the budget was inadequate with a shortfall of funds needed to meet expenditures. Invoices had not been paid for several months by the previous management company, requiring an immediate special assessment to raise funds. The board had no idea what was going on since they were not getting a worthwhile management report.

A property management company has accounting and finance staff with systems of checks and balances that protect owners from misuse of funds. The way the accounts receivable department processes payments and the accounts payable department pays bills enables the managers to meet their goals. Support also comes from staff accountants specifically assigned to properties to prepare and review financial reports. This further enhances the managers’ ability to serve the community. The qualifications of the accounting and financial staff and the ratio of staff to properties managed are indications of the quality of the management firm.

Solutions

In the three scenarios discussed, the combination of boards being divorced from the payment of invoices and their not receiving a professional monthly management report was deadly. It should come as no surprise that boards are concerned about the way their properties are managed when they do not receive a monthly report that puts their minds at rest. It is indicative of poor management when reporting is inadequate and leads to tension between boards and management. Communication is everything.

All property management activities culminate in the presentation of a monthly management report. That should be presented in a binder divided into major headings. The manager then leads the board through a financial report, legal report, correspondence, miscellaneous items, and action items that require a decision by the board.

Boards can easily review events in the life of the property over the past month and fulfill their true function as a decision-making body. Several factors that appear in a report measure the quality of management services provided, examining the manager’s efficiency in sending out correspondence, responding to owners, and obtaining proposals. A professional presentation ultimately expedites meetings. When properly prepared, the monthly report can easily be referenced to assist in planning and controlling costs at the property.

The following should appear in a management report:

A. Financial Section
1. Financial Summary of the Monthly Cash Flow
2. Statement of Cash Flow
3. Drill Down of Expenses
4. Bank Reconciliation Reports
5. Expense Distribution Report

B. Legal Section
1. Statement of All Open Accounts
2. Arrears Report
3. Legal Status Report
4. Sublet Status Report (Cooperatives)
5. Copies of all legal correspondence

C. Correspondence Section
1. Copies of all correspondence addressed to the management company or the board
2. Copies of all correspondence mailed by the management company or the board
3. Copies of service requests sent via mail, e-mail, or web site
4. Responses to service requests received by mail, e-mail, web site, or telephone
5. Board responses to owner requests

D. Miscellaneous Section
1. Magazine and newspaper articles related to the management of the property
2. Contract information
3. Agreements signed by the board
4. Notices sent to the community
5. Anything that does not come under the other sections of the management report

E. Response Section
1. All action items that require a decision by the board
2. Contract proposals for services to the property
3. Owner requests for outside services as defined by the proprietary lease, bylaws, or declaration of the condominium
4. Owner requests for a variance to perform work that would otherwise be in violation of the proprietary lease, bylaws, declaration of the condominium, or house rules
5. If the board does nothing else at their monthly meeting, they should render decisions on these action items.

When a board receives a comprehensive management report, it increases its ability to plan for and control costs. The management report reflects the services provided by a management company. Board members should read the management report cover-to-cover before a board meeting. They should call their property manager with questions about the report prior to the meeting. If the property manager does not have an immediate answer, it can be researched in time for the meeting. Following these guidelines results in efficient management, productive board meetings, and a disaster-free environment.