The Fine Print

Hiring a new management company is not for the faint of heart. Boards must do their due diligence — researching companies, conducting interviews, getting RFPs. After they’ve made a choice, then comes the most important step of the process: poring over the details of the management contract. Companies tailor contracts to their needs, which don’t always match the building’s needs. The task for boards is to reconcile the differences between the two.

“Boards typically change managing agents because they don’t like the way they’ve handled business — or failed to — so you want to be sure you’re in agreement with your new company,” says Lloyd Reisman, a partner at the law firm Belkin Burden Goldman. “Managing agents want your business and are willing to engage in negotiations. So don’t be shy.”

Whether you review a contract yourself or have your attorney do it, certain terms require extra scrutiny. Here are the key areas to pay attention to before signing the dotted line.

On-site presence. To ensure boards are getting the services and attention their buildings need, contracts need to specify how often and how many hours the agents will be at their properties. While management contracts often say agents will make visits as needed, setting a firm schedule is something boards do have leverage to negotiate. “Our contract specifies at the outset that we will make whatever visits are necessary to perform the services,” says Ben Kirschenbaum, a vice president and the general counsel at FirstService Residential. “If there’s a lot going on in the building, it may have to be two times or three times a week, but it can be less frequent if things are running smoothly. Still, most boards insist that we put it in our contract that the manager will not be there less than one time a week.”

Ancillary fees. In addition to an annual or monthly management fee, there are going to be additional charges for duties like sending safety notifications and handling purchase applications, alterations, transfers and sublets. “You should expect an addendum that clearly describes these a la carte fees,” Reisman says. “They arise regularly and are charged on a per-unit basis, so the costs can quickly add up.”

And boards need to clarify what services they don’t want. “As management companies consolidate and get bigger, their contracts might have ancillary fees for things you don’t need, such as insurance brokerage or energy consulting,” says Scott Greenspun, a partner at the law firm Braverman Greenspun. “You want to take those off the list because it might make your contract less expensive.”

Spending limits. It’s also crucial to spell out how much authority the managing agent will have for nonrecurring expenses, such as the purchase of materials to make building improvements without board approval. “You don’t want to get bogged down signing off on small expenditures,” says Adam Finkelstein, a partner at the law firm Kagan Lubic Lepper Finkelstein & Gold. While it depends on the size of the building, he recommends starting out with a limit — say, $2,500 — under which management can pay for nonrecurring expenses without getting signoff from the board. “Once you get comfortable with your new agent and that person’s decision-making process, you can raise it to, say, $5,000,” he adds. “That amount is more in the sweet spot for most buildings.”

Project management. Most management companies put into their contracts that if a building undertakes a project that costs over a certain dollar amount, they’re entitled to charge a fee to manage the project. Boards need to pay attention to what that threshold is, especially if they’re facing major repairs, and feel comfortable with it. “That still leaves the question of what minimal services management has to provide if you’re not going to hire them as project manager,” Greenspun says. “So, for example, you’d want to nail down that management is responsible for assisting the board and counsel in making sure that the vendors hired are adequately insured.”

 Indemnity and insurance. Indemnifying the managing agent — which means the building’s insurance will pick up the defense costs if management is sued by another party — is the issue where boards get the most pushback, so be prepared. “We need to be protected on allegations by owners that we did something wrong and we didn’t do anything wrong,” Kirschenbaum says. 

Of course, indemnification doesn’t apply if there is gross negligence or willful misconduct by the managing agent. Since boards often get dragged into such lawsuits, there is an extra layer of protection available: mutual indemnification. “If someone sues the board and the managing agent, the board must defend the claim,” Kirschenbaum explains. “If the court determines that it is the managing agent’s fault, and the board’s insurance does not cover the loss, then the managing agent indemnifies the board.”

Reisman adds that boards should require managing agents to have cyber liability insurance and put that in the contract. “Management companies often transmit sensitive information to boards electronically,” he says. “If they’re a transfer agent or any money is coming through them, there’s the possibility of wire fraud. Better safe than sorry.”

Termination. While it may be tempting to sign a multiyear management contract in order to get a lower price, it’s not a wise move because you don’t want to get locked into a partnership if management service is unsatisfactory. Most contracts are for a one-year term, often with the provision that they can only be terminated with cause. But since what qualifies as cause is debatable, boards should push for being able to terminate without cause on 30 or 60 days’ notice. As for the other way around, boards can protect themselves with a term that requires management to give 60 — preferably 90 — days’ notice if it is terminating the contract. “Otherwise, it’s going to be hard for the building to mobilize, get bids, interview and engage a replacement company,” Finkelstein says. “You need that window.”

There’s also a preemptive move to help a termination proceed smoothly — a contract term obligating the managing agent to set up a separate email account for the building. “Because there’s so much communication through email and a lot of your records are preserved there, you want to make sure you have easy access to all that information,” Greenspun says.

It’s also essential to specify that management must provide a detailed accounting of your  building’s bank statements, checks written that are still outstanding and bills that are coming in. “In the event of a termination, the outgoing agent can only hold back the monies that are justified,” Finkelstein says. “You don’t want the company holding your funds captive.”

In the end, Greenspun says, “the hope for any building hiring new management is that it’s going to be a long-term relationship. So you want to make sure the contract is in your building’s best interest and that nothing gets overlooked.”

[SIDEBAR] Making the Switch

Ariel Rosner

Former Board President

1075 Grand Concourse,

The Bronx

Six stories, 111 units

Transitioned to: 

HSC Management Corp.

Changing management companies is the last thing any board wants to do because it’s so stressful and a lot of work. We did it because there was no level of accountancy and our old managing agent really dropped the ball. It was kind of an all-hands-on effort, with a committee of board and non-board members vetting companies, going on a WhatsApp of co-op boards in our neighborhood and checking out references. We narrowed it down to two companies: one that had a huge portfolio and another that didn’t have a lot of property managers. The second company told us it would probably not be able to pay us the attention we needed. 

We really needed a company that would man the ship. The previous one didn’t file various tax forms, and we had a lot of violations that had to be paid. People couldn’t sell their units because no one was forwarding documents to the mortgage company. A shareholder’s bathroom renovation went wrong because the agent didn’t ask for a licensed plumber. Then the contractor who came in to repair things burst a pipe, resulting in flooding three floors down.The agent hadn’t checked his insurance certificate, which had expired, so the co-op had to pay close to $30,000 to fix the damage. Worst of all, we had a $500,000 facade project that spiraled to almost $900,000 and took four years to complete, largely because no one had followed up with the architect on filing dates and the architect was allowed to charge $5,600 monthly for administrative retainer fees, even during times the project was stalled.

Our old management contract was about $5,500 a month. We negotiated a deal with HSC Management to pay about the same monthly fee and locked it in for two years. So shareholders wouldn’t be upset, we sent out an email breaking down all the costs and showing that the fees were comparable. We were wasting a ton with our previous company, and we figure any extra money per month is well worth it for a managing agent who will actually do their job.

Rosner’s comments have been condensed and edited for clarity.

Andrea Brown

Vice President

543 Main Street Condominiums, 

New Rochelle

Five stories, 99 units

Transitioned to: 

Ferrara Management

Over the years, we’d had several management firms, and there was always a lot of frustration, mostly about poor communication. It took us time to start the process of finding a new one because we were focused on fixing building issues, including flooding in the basement and incorrect pitches on the balconies that were causing water to pool on them. Once those were resolved and a new board was elected in 2022, the search finally began. Each of our five board members had to identify at least two potential firms. I spoke to friends in the community who were on the boards of their buildings. Once a member recommended someone, it was their job to reach out to that firm, have a face-to-face meeting and then bring feedback to the board.

Our building is very diverse and so is our board. One of the things that is always a concern is whether the management company will be able to handle dealing with this diversity. Additionally, we were looking for a managing agent who had buildings in Westchester and was familiar with local vendors and professionals. As an all-electric building — the condo was built in 2006 — we wanted someone with experience dealing with the complexity of that. Being able to get information from them easily and look at how they manage their books was also important. And we wanted to include in the contract that the company cannot hire or fire staff without our approval. We have employees that have been with us since the building’s construction 18 years ago. They’re part of our community, and we wanted them to stay here. The staff issue was not a leading concern, but it was important enough to us to have it in the contract.

There was definitely a cost increase in switching to new management, but our budget could handle it. The contract began last October, but things had become so untenable with our previous agent that we started the onboarding process a month before. Still, this was not a change we made lightly. Aside from a few hiccups, the transition has been smooth and it’s been a positive experience.  

Brown’s comments have been condensed and edited for clarity.

Steven Santiago

President

4260 Broadway Condominium, 

Manhattan

Two buildings, 114 units

Transitioned to: 

FirstService Residential

Our transition was mostly prompted by a lengthy litigation involving our old management company, the board and our commercial tenants. But there was a lot of other dissatisfaction from failing to maintain the building and not handling complaints like noise issues. It was a small company with three staffers, and our managing agent showed up only once every few months. 

We’re a Generation X and millennial crowd, and we were very naive when we began looking for new management — baby steps, really. We did internet searches because we didn’t know where else to start. We sent out so many feelers to companies and got some responses, but many just sounded completely disinterested. We were being very transparent about our problems, including the ongoing litigation, and may have scared them. We wanted structure and organization, and a large company with different departments and a big support staff aligned with our needs. The cost was a little more than what we were paying, but we were able to negotiate some fees, which played a huge part in our decision. We got the purchase application fees down from $700 to $575. The processing of lease renewals was decreased from $300 to $200, and coordination and assistance with refinancing of residential mortgages also went from $300 to $200. In addition, FirstService agreed  to lower its annual 4% cost increase to 3%, which may not sound like much but will really make a difference to unit-owners. 

Because of all the bad experiences we had with our old management company, we went through every little detail to ensure that it wouldn’t happen again. The process took about a month going back and forth between counsel, and we signed the contract in November. With our changing and younger demographic, the switch is part of our goal of having a new vision for our condo going forward.

Santiago’s comments have been condensed and edited for clarity.