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 the pandemic has caused many of their ancillary fees to dry 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 for a managing agent, and I could see how they're worried. They have all these agents doing a lot more work and maybe collecting less revenue because so many of these contracts rely on ancillary fees, which include handling applications for subletting, transfers, alterations – 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.’”

“The reality is, in this terrible crisis, the bulk of our business is protected,” says Mitchell Berg, the director of strategic planning at the management company Maxwell-Kates. “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.”

Adds A.J. Rexhepi, vice president of Century Management: “For every board member who thinks their manager is doing a great job, you'll find a board member who thinks life has been somewhat easier for the property managers [during the pandemic]. I think that's shortsighted, and I think it's unrealistic.”

Before the pandemic hit, many management companies had established benchmarks for when ancillary fees kick in. For instance, 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 exceeds $50,000, the management company might demand an ancillary fee – either a percentage of the project’s budget or an hourly fee.

Khandros points out that in the past few years, many management companies have implemented such fees. “Above a certain dollar amount, managers basically say, ‘We're not doing it. It takes too much time. You're going to have to enter into some sort of agreement with us to pay us either hourly or some other fee.’ I could see that potentially happening here.” 

However, there’s a flipside to knowing what you’re worth – and demanding to get paid that number. “The problem is that there's always somebody who will undercut,” says Berg. “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.’”

For now, Khandros says, managers and their companies will likely soldier on through the crisis. But what happens afterwards 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 that we now have to comply with, and we're spending 20%, 30%, 40% more time now. We need 10% more, 30% more on the annual fee.’”