Management Metamorphosis

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Hey, what a great price! You’ve been looking to hire a new management company, and the one you’ve chosen sounds perfect. You like the agent, the company has a good reputation, and the quoted annual rate is well within your budget. Based on that, you go ahead and start drafting your co-op/condo’s financial plan for the year – and then, six months later, you’re several thousand dollars in the hole.

What happened? It turns out that the company’s great rate was just a baseline. You’ve been paying extra for everything from postage to photocopies, mailings to filings. Many companies even charge you for maintaining your building’s checking account or reconciling your bank statement at the end of the month, things you might reasonably expect to be part of normal business – you have to have a checking account; it’s not some extra nicety.

Many board members may not realize it, but there are different philosophies out there among management companies – not always made clear – between all-inclusive pricing and à la carte pricing.

Unexpected Add-ons

“When you get a quote from a management company, what does that quote include?” asks Fred Rudd, president and founder of Rudd Realty. “We’re taking over the management of a building,” he recounts by way of example, “where we quoted a $42,000 [annual] fee that was all-inclusive, with some exceptions that I mentioned. And they said, ‘We’d like you to handle us, but we’d like to pay what we’re paying our current management company,’ which was $36,000. I did some calculations and said okay. And when I got all the building documents from the old company and saw the financial statements, I saw, yes, the building was paying $36,000 – but with add-ons, they were paying $60,000 total. There was $24,000 a year in additional charges.”

That’s something Paul Miller, board president of the 189-unit, prewar co-op at 308 East 79th Street, specifically sought to avoid when the building switched companies 18 months ago to Douglas Elliman Property Management. “That wasn’t what we were looking for,” Miller, director of the marketing and branding company the Pinwheel Group, says of à la carte structures. “We were looking only for a full package. Otherwise you could drive yourself crazy with, ‘Well, that’s not in the contract, it costs extra, so who on the board is going to do this to save a couple bucks?’ Because the board is not paid to do those kinds of jobs. It’s already an onerous enough job.”

And many board members, especially new ones like Viktor Koen – an artist/illustrator who serves at a two-building Manhattan co-op with more than 100 apartments – aren’t even aware that two types of fee structures exist. “I didn’t specifically know that,” he says. “But it does make sense to me.” What type does his co-op have? “I think we have a flat-rate arrangement, but you know, I’m not really sure.”

No Purity: A Matter of Degree

The first thing he and other board members should realize is that “flat rate/all-inclusive” and “à la carte” are matters of degree along a spectrum. Virtually no property management firm is all one or the other. The annual Habitat “Business of Management Survey” shows a couple of firms that include virtually all filings (lead paint notices, window guard notices, etc.) in their flat fee, do not charge extra for working on capital improvement projects, and do not charge to maintain the building’s bank account. At the other extreme, there are firms that have a per-unit charge for all filings, charge a percentage of the capital improvement cost if you want them to oversee it, and charge you bank fees.

However, most fall somewhere in between. Note that a high annual minimum doesn’t guarantee that fees won’t be charged: one firm with a $36,000 minimum, on the high end of the scale, has hosts of add-on fees, while one with a $12,000 minimum does not.

Nor are the arrangements immutable. “I go to interviews and say this is our price and we don’t nickel-and-dime you,” says Don Wilson, president of Blue Woods Management. “But there have been new regulations that have come into play where we do have to charge for certain things.”

With the introduction of new energy-benchmarking regulations and numerous complex requirements of Local Law 84-2009, Wilson notes, “We had to hire somebody to put together a significant amount of information and input it to the city system, and we charged a nominal fee compared to what I heard others were charging. In the last four or five years, a number of those kinds of [new municipal requirements] have come up,” including new lead-paint safety regulations and water-tank record-keeping regulations.

Many Factors to Consider

Of course, numbers alone don’t tell the whole story: you also choose a firm based on such intangibles as reputation, your comfort level with a particular agent, and even geography – a Bronx co-op, for example, might consider that last factor if thinking about a company on Staten Island. But the choice between all-inclusive and à la carte remains one of the single most important points that a co-op or condo board must keep in mind.

“It’s like when you buy a new car,” suggests Peter Lehr, director of management at Kaled Management. “You take it for a spin, you’re comfortable in it, you know the name [of the auto-manufacturing company or brand], you’re salivating, and then all of a sudden you’re in front of this other salesman, and he’s hammering you about mud flaps and this add-on and that add-on. Mud flaps? Do you really need mud flaps? You have to be careful about those extra costs.”

What are the areas most likely to run up unexpected fees? Managers say they’re office expenses such as postage and photocopies; bank charges; filings required by the city and state; and overseeing capital projects.

“There are companies that charge for individual Xeroxes,” says Rudd. “Some charge for every fax.” Some, he claims, “charge you back as cost-plus – so if it’s cost-plus-20-percent for every copy or fax, that can add up to quite a bit of money.” Talk to enough property managers, and you’ll hear anecdotes about companies that purportedly use postage as a profit center, charging a dollar a letter.

“If you’re going to make a proposal to a perspective client,” says Lehr, “your management fee should be based on what is an objective, fair assessment of what you think it’s going to take your manager and your back-office staff on an annual basis to efficiently manage their property. We don’t charge for phone calls or faxes.” For photocopies, yes. “For copies, we punch in a building’s code number” on the photocopier to keep count for billing purposes. “Postage is the same way” – but straight cost only.

“We don’t charge anything for normal management correspondence,” says Blue Woods’ Wilson, “like sending a letter to a shareholder or to an attorney on behalf of shareholder. If I have to send it FedEx, I would charge it.”

“We don’t keep a list by the postage meter of every letter that goes out,” says Jeffrey Weber, a principal in Weber-Farhat Realty Management. “I’m just not the type to nickel-and-dime someone where each time they call I keep a record of when they call and how much time I’m spending.” Buildings pay a management fee, he says – it’s not like a lawyer’s retainer, where every phone call and letter carries an additional charge. “Charging for bank reconciliation?” he marvels, referring to the standard bookkeeping practice of reconciling bank statements with check amounts. “You have to do that,” he says with a laugh. “It’s part of the job.”

Wilson sees photocopies the same way. “At the end of the month we print financial reports that are fairly lengthy and which we hand deliver to every board member and mail to the accountant. You could easily be sending out 500 sheets of paper, so that’s a big duplicating job. But that’s a service we provide as part of our fee.”

It’s an inexpensive way of building good will, as well: copier wear-and-tear and electrical costs are part of overhead, after all, and a 500-sheet pack of paper costs just $6.79 at Staples. (Admirably for the environment, “We’ve been able to cut back on that since a lot of board members are getting them electronically now,” Wilson says.)

Capital Projects

Where management expenses can really pile up is on capital-improvement projects, such as building-wide window replacement, a new roof, or the installation of a new boiler. New York City management companies are about evenly divided on whether or not – and in which manner – they charge to oversee capital improvements.

Lehr, of Kaled, sees both methods as viable, depending on what’s required. His company has no capital-improvement fee if the client has already retained the services of a consultant to design and construction-manage a project. “Then I see my role strictly as attending site meetings and making sure the consultant and the contractor are both living up to their contracts.” On the other hand, “If a board says, ‘We want you to manage the project,’ then I’ll negotiate a fee and it’ll be a percentage” of the job’s total cost, one common though not universal method of billing.

Some managers are critical of the percentage-of-job fee structure. “What is my incentive to keep down costs in that case?” asks Weber. “That’s putting the fox in charge of the henhouse. My incentive is to get you the best price and cut my fee? To me that’s a conflict of interest.”

Rudd agrees. “If they’re involved in planning and bidding the project and they’re being paid a percentage, they could theoretically manipulate the bid to get more money. Does everyone do that? Of course not. Are most of my competitors honorable? I would hope so. I would expect so. But it’s still a disincentive when somebody is creating bids on a job.”

Lehr, whose management company is one of many that take the percentage approach, says such concerns are misplaced. “The job is the job. When you go out and do competitive bidding, you’ve got numbers closely spaced out and a couple way high and way low, and the job is worth what the middle ground is saying. My client is going to pick the actual vendor. I have no control over that.”

He acknowledges that with any sort of capital project unexpected structural issues can arise, and with them, extra costs that can raise a fee based on percentage. But Lehr stresses that companies have to consider the long-term relationship. “You don’t want to run your number up,” he says. “You want to do the right thing for your client.”

“I haven’t come to the point yet where we’re going to do that,” Wilson says of charging project-management fees. “If a building came to me and said, ‘We’re going to do 10 capital-improvement projects in five years, that might be different. But it’s usually just one or two and then the building is quiet for a couple of years.”

It’s hard to compare, though, since “project management” is generally done by an architect/engineer or a specially hired project manager with an engineering background, whom a board retains to be on site every day to oversee the work, answer questions, facilitate fixes, and report back to the board. But the amorphous term “project management” can also mean being the point person who facilitates communication among the board, the residents, and the architect/engineer.

“All of these projects generally have an outside engineer who’s being paid to supervise the work,” Wilson says. “Other than making sure the work is being done on schedule and on budget, the manager’s job is more to communicate to residents – what’s being done when, and if there’s a setback, what’s being done to fix it.

“A one percent management fee [for capital improvements] can be a big rip-off once you consider the engineer’s fee and that [the architect/engineer has] prepared the specs and is signing off that the work’s been done to their specs. Management definitely has to be involved and it takes time, but it’s not like you have to be standing on the scaffold three hours a day.”

Rudd, who says managing capital improvements comes as part of his base fee, describes his company’s definition of the job this way: “We oversee the project on behalf of the building and report back to the building’s board. We attend every job meeting, as does the architect, who keeps the minutes and produces them every week.

“Right now, I’m overseeing a roof-replacement project that’s going to cost the building around $300,000. I’m at the building every week anyway, and generally twice a week because of other things, so meeting with the building staff and talking to the board about alterations and coordinating with the architect, that’s part of my regular job as a managing agent.”

What a Board Can Do

So what can a board do? Ask questions, of course – but what and how many? A board can’t think of every possible scenario where a management company might have unexpected fees. A mileage charge to drive to your building? A fee to attend the monthly meeting if there’s a thunderstorm that night? Aside from the points brought up in this article, such as postage, photocopy and project-management fees, what can you ask about without it becoming overbearing?

“Good boards do ask questions,” says Rudd. “We’ve gotten so many of the same ones that we’ve actually put together a FAQ [“Frequently Asked Questions”] sheet that we send out.” Some boards, he says, send highly detailed “Request for Proposal” (RFP) forms. “Sometimes we’ll get an RFP that’s seven pages long.”

And sometimes, overreliance on a checklist of questions can miss the forest for the trees. “I’ve sat through interviews,” says Wilson, “where they’ve gotten hold of this one script I’ve heard before – they found it on the internet or something. And it’s kind of annoying to be interviewed that way because it’s not really a discussion – there’s no real room to explain things because they’re on to the next question. I much prefer having a couple of meetings with them so they get a sense of what we do, and for us to get a sense of what’s going on in the building and what we can do to try to help them. That works a lot better than going in and it’s a machine gun of questions and they’ve got you slotted for 45 minutes and you’re not really allowed to elaborate because there are time constraints.”

It all comes down to expectations: a board can’t foresee every contingency for which it might be charged. And a management company can’t foresee every unexpected obstacle that takes time and effort above and beyond. Simply be aware that companies may charge extra for things a board might consider the normal cost of doing business – and when you insist that a company be reasonable, reassure that you will be also.