New Kid on the Block

There is a third dimension beyond that which is known to boards – a dimension of size, a dimension of cash, a dimension of new economic realities. It is the middle ground between large management firms and self-managers, and it lies between the pit of a board’s needs and the summit of its budgets. It is a dimension we call “The Boutique Zone.”

The evidence is anecdotal but fits the pattern of past economic downturns: laid-off professionals from fields as diverse as finance and architecture go into business as property managers – hanging up shingles for small, maybe one-person companies. Rarely working out of commercial offices, they advertise on such websites as Craigslist. While these small operations – which charge far less and offer far less than traditional, full-service property managers – may fill a need for equally small properties that might otherwise be self-managed, caution needs to be taken, as at least one board president can attest with a less-than-favorable experience during a previous downturn.

“In my old building on [West] 87th Street – two brownstones together, 20 units – the sponsor was the managing agent,” recalls Ari Mintz, now president of the block-long, 120-unit Manhasset Apartments co-op at 301 West 108th Street and 300 West 109th Street. “The contract was up, and we looked around and we got a good tip from someone on the block who knew these architects. The economy then wasn’t good for architecture, and so they were becoming managing agents.”

Sounds logical. Architects know buildings and buildings systems, they work with boards and vendors, they’re experienced professionals who know enough about accounting, bookkeeping, taxes, and the like to run their own business. “But they didn’t have deep roots [in property management], and that hurt the building,” Mintz laments, “because when the economy turned around and architecture came back, all their earnestness and the ability to do things on the managing-agent level disappeared and their flaws suddenly showed.

“They weren’t malicious,” he allows, “just inexperienced. They’d presented themselves really well, and they had the desire, but when the economy changed back, they couldn’t devote as much time to the management side.”

“Board members who used to be in finance now decide they want to go into the management business,” observes veteran manager Ira Meister, president of the three-decade-old Matthew Adam Properties. But having Meister’s kind of experience “doesn’t happen overnight.”

With all this in mind, hiring a small, dedicated, “boutique” management company could be a sensible choice for small co-ops and condos where self-management may not be workable – no one wants to volunteer, the building may have issues requiring professional expertise – and engaging a large management firm may not be financially feasible. Like the new breed of walkthrough inspections as an alternative to full-scale, high-cost building-conditions report (see “FYI: The Walkthough,” Habitat, December 2008), this may be the viable middle ground between, metaphorically speaking, arming yourself and calling for the marines: bringing in a hired gun.

“My idea was to aim at a niche that I felt was underserved, which was small buildings, 10 units or less,” says Steve Landfield, the lone gunslinger of SL Building Management, who works out of the West 28th Street office of the small brokerage NYC Homes, where he’s a director of the commercial division. “I felt buildings of that size aren’t of interest to the larger companies. And if they even were to be interested, [large companies] have such high overhead it probably wouldn’t be cost-effective for them” to that on such. Essentially, I only need a couple of computer programs, my home computer, and my BlackBerry.”

That may or may not be so. “They go out and buy [the popular off-the-shelf accounting software] Quicken,” Meister says of boutique managers, “where with our computer system, our software cost over $100,000. The maintenance on it alone is probably $12,000 a year.” Perhaps even more important, however, is for management hunters to be aware of New York State’s legal requirements for property managers and good business practices generally.

“If you’re a sole practitioner, you need a broker’s license,” says Marolyn Davenport, senior vice president of the Real Estate Board of New York (REBNY). Article 12-A of the state’s Real Property Law (RPL) says this applies to anyone who collects rent – and, notes Davenport, “Maintenance would be rent – there’s a proprietary lease.” (And even with condos, where carrying charges aren’t technically rent, you’d want anyone who’s handling your money to have passed all the many certification courses that an applicant for a broker’s license must take.)

A real estate broker’s license is different from a real estate salesperson’s license. New York’s Department of State, which regulates such things, specifies that, “A real estate broker is responsible for the supervision and conduct of the real estate brokerage business,” and is actually the “”representative broker” who “holds the license on behalf of the brokerage.” A real estate salesperson, conversely, simply “works for and is supervised by the representative broker.”

If someone is a sole practitioner, he or she needs a broker’s license and not just a salesperson’s license. The type of license will likely be “Individual Broker/Class 35” (a license to do business using his/her personal name only) or “Trade Name Broker/Class 37” (for “a sole proprietorship, doing business as a name other than his/her personal name.” This requires that a business certificate be filed with the office of the county clerk where the business is located).

Another major thing to look for is that he or she carries a fidelity bond – an insurance policy that covers losses incurred by fraud. While neither the state nor the city requires it of a property manager, the state’s Division of Housing & Community Renewal offers a standard, downloadable “Owner/Agent Agreement” and accompanying “General Conditions of the Contract for Managing Agents” that suggests a fidelity bond equal to at least 25 percent of the annual rent roll.

You’ll also want whoever’s representing you to have errors and omissions insurance, which protects you from liability for mistakes made in the performance of professional duties. Note that these policies generally cover only financial losses, and not liability for bodily injury and property damage.

Beyond these critical elements, choosing a boutique firm involves most of the same things as choosing any managing agent – with one key difference: a manager starting out might not have many or even any references from other buildings. But, that new manager may have references from the management company, brokerage firm, or other corporation from which he or she may have spun off – or, perhaps, from residents of a building where he or she may have been on the board for 10 years. And while that may sound iffy, keep in mind we all know boards that have hired managers with impeccable references who turn out to be not so good. References are only be part of the mix.

As a trade-off for taking a gamble on someone new, of course, you should expect to pay proportionally less than you would for a big, established, full-service firm – though you might lose the economy of scale and the influence that large companies can offer. “If you have a problem with a contractor, the guy has no clout,” says Meister. “We have clout – we have over 100 buildings and can say to a contractor, ‘You’ll never work for us again – go fix this now.”

“Overall, I’m a little skeptical that you can say, ‘Well, I handled a big hedge fund, I can manage a 200-unit building,’” says REBNY’s Davenport. “How does that relate to keeping the boiler running? [A manager needs] to understand the whole financial picture of a co-op – how you budget, what you assess for, how you maintain your reserve fund, how you operate your day-to-day expenses, how you implement the budget, how you track it from month to month and project costs. It’s a job that’s very detail- and paperwork-oriented, and you have to have good systems in place to handle that.”

But that’s no different with self-managed buildings, and some co-ops and condos get along perfectly well that way. But if your place is just a little too big or complicated for that, or if everybody who lives there is simply too busy making a living these days to volunteer to self-manage, a hired gun may just hit the target.