Are Management Fees Due for a Day of Reckoning?

Amid all the uncertainty the coronavirus pandemic has unleashed in New York co-ops and condos, there’s one undeniable fact: property managers are working harder than ever, while many of their ancillary fees have dried up. As a result, many believe the industry will soon be in for a day of reckoning.

“Buildings over the years have wanted more and more services for less money,” says Leonard Khandros, a partner at the law firm Tane Waterman & Wurtzel. “You throw something like a pandemic into the mix, which increases the workload, and I could see how they’re worried. They have all these agents doing more work and maybe collecting less revenue because so many of these contracts rely on ancillary fees – all of which have dropped off. I definitely see that when these contracts expire, some will try and say: ‘Look, I’ve got all these additional expenses. You have to pay me more.’”

Mitchell Berg, the director of strategic planning at the management company Maxwell-Kates, adds: “The reality is, in this terrible crisis, the bulk of our business is protected. But it does hurt badly that we can’t get the ancillary fees associated with sublets and refinances and sales. We are doing some closings, but it’s a fraction of what it was.”

Before the pandemic, many management companies had established benchmarks that determined when ancillary fees kick in. Coordinating a Local Law 11 facade repair that costs less than $50,000 might be included in the manager’s annual fee. But if the job exceeded $50,000, the management company might demand either a percentage of the project’s budget or an hourly fee.

But there’s a flip side to knowing what you’re worth – and demanding that amount. “The problem is that there’s always somebody who will undercut,” Berg says. “If the right price is $50,000 to do a proper job with an experienced account executive, someone else will take it for $38,000. Most boards are responsible and do their due diligence. But if you’ve got a board whose ultimate priority is financial, (they’ll say), ‘Let’s just go with this firm and save $12,000 a year.’”

What will happen after the pandemic is uncertain. “A lot of these agents are going to have to reevaluate their business model,” Khandros says, “and determine whether they’re going to be able to convince a board that ‘we have all of these additional requirements imposed by the state, the city and maybe the federal government, and we’re spending more time now. We need 10% more, 30% more on the annual fee.’”