Tough Transition

It’s not uncommon for boards to run into problems when they decide to hire a third-party management company to replace the sponsor who converted the building and who has been managing it for many years. As time goes by and sponsors sell off their units, they can gradually lose interest in managing the property, and that includes maintaining proper books and records and providing them to boards. 

Double trouble. At two buildings I recently dealt with, the boards ran into just that problem when they decided to switch to outside management and realized that they didn’t have the documents needed to prepare their financial statements. We started working with them before the new management companies came on, and discovered they only had a couple of management reports, maybe a QuickBooks file and some bank statements. We were able to dig around online and get the bank statements and extract what we needed. 

The next step was determining the buildings’ revenue. Everyone knows how much they’re paying in monthly maintenance or common charges, so we were able to compare all the cash that came in with what the buildings should have received. As for payments, when we questioned the boards more closely, they said: “Oh, we have this and we have that. And we know this amount came in.” We were eventually able to piece all the information together. Obviously, we’re not doing an audit on this type of financial statement, but we were able to come up with something that made sense.

Preventive measures. Whether you’re being managed by a sponsor or a third-party management company, the ideal for any board is to receive a monthly financial report. Most of the bigger management companies do put them out, and I’ve worked with some sponsor management companies that have very good sets of books. Before bringing on a new management company, boards should always ask about financial records. Is the company issuing them on a quarterly basis? Or every six months? At the least, you have to get something annually. If you’re looking to make the transition to another management company, the sponsor’s management company is not going to be forthcoming with information. So before you get to that point, try to gather what you can if you haven’t been getting what you need.

Why it matters. When people buy into a building, they want to make sure the investment is sound. No one is going to spend a million dollars on an apartment if he or she doesn’t know the state of the building’s finances. If financial statements are coming out in six months or there hasn’t been a financial statement in two years, that’s going to hold up sales, and you’re going to have people handcuffed into staying in the building because they can’t sell their units. That’s the worst-case scenario.

Boards have a fiduciary duty to obtain financial and other information from management. If you don’t get monthly management reports, get bank statements and go through the balances. Boards should also  have a list of payables. A lot of times a new management company takes over and suddenly vendors come out of the woodwork and say, “You owe me money.” The bare-bones minimum should be a financial statement of some sort, a tax return and monthly management reports. You’re in the dark if you don’t have that basic information.