Rethinking the Management Business Model

It’s been a decades-long rant from those who manage co-ops and condos: We’re not being paid enough for what we’re providing. In the last three years, though, the reality of this rant has put the property management industry in a bind: how do you change a business model that was created in the 1980’s to one that reflects the services required today?

The Management Foundation

At the crux of this business challenge is the base fee, a number that has defined the management industry for decades. “It’s a crazy model,” says Neil Davidowitz, president of Orsid Realty. The result is that management proposals for new business are made without knowing how much time it will take to operate the building and, more importantly, to deal with the board. Professionals like lawyers, accountants or architects – the people boards usually hire to fix a problem – either charge by the hour or have a good sense of how many hours it will take to solve the problem, says Davidowitz. “I don’t know how many hours it’s really going to take to run a building,” he admits. “I can guesstimate. But you really don’t know until you’re there.”

It’s the “there” landscape that is causing ripples throughout the management community today. The landscape that the management business was built on has significantly changed, and it’s now pushing companies to the brink.

The reason? Compliance.

“There’s been a lot of additional things over the last three to five years that have, quite frankly, forced management companies to create compliance departments,” says Michael Wolfe, president of Midboro Management. New York City has passed countless rules and regulations – 16 new laws in 2019 alone. From facade safety to building emissions to employee rights, the management of co-ops and condos has gone from basic building operations to a complex ritual of filings, oversight, and project completions. The bulk of this responsibility has fallen to management, and the fee structure that has been the foundation of this business is now, perhaps for the first time, under real fire.

Chinks Appear

The prospect of a new management business model – potentially a more expensive one – is not in the budget of most co-ops and condos. While the management industry is under pressure, so too are co-op and condo boards. Their budgets, after all, have to bear the costs of what is being complied with.

“We know that it’s an age-old problem that buildings want to pay the least and get the most from management,” says Dawn Dickstein, president and founder of the MD Squared Property Group. But something has got to give because management executive after executive interviewed for this article agrees with Dickstein when she says, “we can’t continue to manage the workload that buildings present at our current minimum fees.”

“Picture this,” Wolfe adds. “Let’s say a property manager manages six buildings. Each building pays anywhere from $45,000 to $50,000, so say $300,000 in management fees. You have a financial analyst, a transfer department, someone handling compliance, an assistant property manager, and a manager. There’s rent and some executive level expense.” The question Wolfe and every other executive interviewed asks is: How can we meet the board’s expectations and fairly compensate the people it takes to do so?

The Ancillary-Fee Fix

The easiest way, of course, is to keep the old business model and raise management fees. In today’s climate, though, this begs the question: How much does it really cost to manage a property effectively? If you accept the fact that one property manager can no longer handle everything, then what should replace this model? Many in the management business are turning to the ancillary fee, not to replace the basic management fee, but to augment it.

Ancillary fees are specific charges for services that every co-op or condo requires. It could be paying for sending out notices to residents, for filing forms required by the city, or for handling transactions related to buying or refinancing individual apartments. Some of these services are what the co-op corporation or the condo association needs to do, such as sending out yearly notices and tax-abatement forms. Others are related to the activities of individual owners, such as transfers, alterations, sublets, and the like.

The result of this shift means that buildings, and the owners who live there, will find themselves paying for what they actually use, rather than having the management company absorb what is needed. Boards will have to closely review the ancillary fee charges when negotiating new management contracts.

For management companies wishing to remain competitive, the challenge will be to get an accurate handle on what these deliverables really cost. “I think the key to this is to not overstep,” says Wolfe, “and to clearly think out what really has changed. This is really not a profit center; you're just addressing overhead.”

Who’s at Risk?

If the management-fee paradigm were to change, smaller buildings could find themselves in a bind. While the number of building and shareholder transactions is small compared to larger buildings, someone still has to fill the role of property manager, and seasoned managers have become a hot commodity. “I have companies trying to poach my people,” says Davidowitz. “In the old days, people would assign six to eight buildings to a manager. I don’t know how one person can [handle] more than five or six buildings today.”

Not only are individual property managers handling fewer buildings than they did 30 years ago, there is a new pressure. “Everybody in this business now has to be proactive, because if you’re reactive, you’re falling behind,” says Steve Greenbaum, senior vice president and director of property management at Charles H. Greenthal. For unseasoned managers working in smaller companies that lack the support larger companies provide, this presents enormous challenges.

The harsh reality facing management companies – and co-ops and condos paying their fees – is that the initial cost of setting up a new client is the same, regardless of the building’s size. “I don't care if you're 10 units or 150 units, it's another account,” Greenbaum says. “It's another monthly report. Funds have to be segregated. There's nothing that's commingled. So every month you have to do all the training and set up and breakdowns, whether the building has 10 units or 1,000 units.”

In fact, many smaller buildings can’t afford to pay even the minimum management fees that are commonly being charged today. “If you had a 10- or 15-unit building back in the 80’s,” Greenbaum continues, “how much can they really afford to be increased?” The challenge for smaller buildings, he adds, is how to align their management expectations with the industry standards of today.

Taking Action

“What has pushed me to take action,” says Davidowitz, “is that we want to service our buildings in a manner they have historically been served.” Compliance has meant that his firm has had to hire additional people. “The bottom line has started to change. If we don’t increase fees, this is a losing battle.”

Additionally, Davidowitz and other managers are looking to change the “night meeting” model that most co-op and condo boards have historically used. While many boards are comfortable meeting in someone’s apartment after work, perhaps over a glass of wine, the strain on the property manager is becoming unsustainable. “Boards finish a meeting at 10 o’clock,” says Davidowitz, “and then my manager gets on a train to Stonybrook, or drives upstate to Pawling, or schleps out to Jersey. Then the next morning they have to be back in for a construction meeting.”

Young managers with families just can’t do this week after week, he says, and seasoned managers burn out. “I lost a manager who had been with me 15 years and who I loved,” he says. “He went to a small company and took less money because he’s got two young kids, and the new company is five minutes from his house.”

Increasing fees and changing meeting times are two ways the management industry is trying to morph into a business model that can succeed in a changing world. For boards already feeling a budget squeeze, there will always be a new, smaller company that will take on management for a lesser fee. Realistically, though, the compliance stakes are high and the cost for missing the mark is more expensive. The question boards must answer is how – or if – they can accommodate the changes so many management companies are intent on implementing.