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License to Manage

For a medical problem, you see a doctor; for a legal one, you consult a lawyer; and for a financial one, you talk to an accountant. It’s the same with your building, too: for a management difficulty, you turn to a managing agent. It’s the same, except it’s different. Doctors, lawyers, and accountants are all licensed by the state and face the loss of their license if they act incorrectly. A managing agent, however, is unlicensed.

THAT'S NO JOKE. A COMPANY practicing in the real estate industry is supposed to have a broker's license. But your manager may not, and unlike a medical practice or a legal firm, anyone who works for a licensed company can practice property management without a broker's license or specific training. And there are apparently many management shingles hung about town with no broker's licenses whatsoever.

"Right now, almost anyone can become a property manager," warns Leonard Jones, president of the New York Association of Realty Managers (NYARM), a trade association. "Even though residential properties are very valuable, I have seen instances where people who never managed property before go in and run things. They have a lot of influence over a lot of people. Our organization offers training for managers but no law says they have to be trained. A lot aren't."

The consequences can be dire. An incompetent agent can run a property into the ground, mismanaging finances and capital systems. A corrupt manager can steal - and many have, as two rounds of kickback indictments, plea bargains, and confessions have made clear.

"Property managers are responsible for the life and safety and funds of millions of people," observes David Kuperberg, president of Cooper Square Realty. Having [no requirements] is unconscionable. Plumbers and taxi drivers have to be licensed, so should property managers."

Yet boards seem unconcerned about the lack of licensing, while many in the industry seem content with the status quo. How did we get here - and is there anything that can be done?

LICENSE TO KNOW
IN GENERAL, WHEN IS LICENSING necessary? According to Douglas Kleine, executive director of the National Association of Housing Cooperatives (NAHC), licensing is most obviously necessary when there is a need to protect the health and safety of consumers (with electricians, for instance). Less obvious situations involve:

(1) A QUESTION OF KNOW-HOW. Some licensing may be necessary where the practice or profession takes a very high degree of knowledge. Minimum educational requirements from accredited sources are the usual response. "A disparity of knowledge between provider and consumer may leave the consumer at a disadvantage in the transaction," Kleine notes. "The appropriate response is to level the playing field by restricting certain practices or requiring 'best practices' and enforcing through licensing and revocation."

(2) A WEB OF LIES. Some situations are rife for deception by the party with the greater knowledge. "The correct response is consumer protection, restitution, and criminal sanctions," he says.

(3) A PAIR OF ADVERSARIES. Some transactions are adversary transactions (such as buyer-seller and landlord-tenant) in which, Kleine states, "licensing is necessary to protect one of the parties, usually through disclosure to ensure fair play, and sometimes with cooling-off periods as an enforcement mechanism."

So what about managers? Should they be licensed? It is not completely accurate to say that agents are unregulated. Legally, a management firm must have a license. But it is not one that has much to do with the skills needed by a property manager. Under state law, a firm or its principal must have a broker's license.

The reason for requiring a brokerage license goes back to the origins of modern management. When the requirements were instituted, most New York City agents worked for owners of rental properties. They usually answered to one person - the landlord - and were primarily licensed because they had to handle financial transactions, such as collecting the rent and negotiating leases. The law clearly spells that function out. Article 12-A of the Real Property Law provides that anyone who, on behalf of another and for a fee, (1) negotiates a sale, exchange, or rental of real property, (2) collects rent, or (3) negotiates a commercial loan secured by a mortgage must be licensed as a real estate broker.

In order to qualify for licensure as a broker, an applicant must have at least one year of experience as a licensed real estate salesperson or at least two years of experience in the general real estate field (e.g., buying and selling property or managing property owned by an employer), have satisfactorily completed both the qualifying, 45-hour salesperson course and an additional 45-hour real estate broker course as approved by the secretary of state, and have passed a qualifying, state-administered examination.

The courses, offered by a number of organizations including the Real Estate Board of New York (REBNY) and New York University, cover a range of topics, including management. The REBNY course is typical, including courses in estates, deeds, leases, contracts, titles, closing costs, land use regulations, construction, valuation, human rights and fair housing, the environment, real estate mathematics, taxes and assessments, rent regulation, sign ordinances, and real estate property management.

"A substantial portion of the course requirements relate to property management," says Marolyn Davenport, senior vice president of management service/government affairs at REBNY. "We have tried to make ours very relevant to property management."

Yet, out of 26 sections in the REBNY course, only one is devoted solely to management for commercial, industrial, rental, and co-op/condo properties. Ronni Lynn Arougheti, a principal in Heron Management, teaches the management portion of the course: a one-day session, which runs from 9 A.M. to 4 P.M. She admits that the session can only offer a superficial rundown of management and adds: "Nothing can be a substitute for practical experience."

Many management professionals say that the broker's license courses do not adequately address the full-range of management duties - and that the skills needed by a good manager are vastly different from those needed by a good broker. "Management is a minute portion of the REBNY course," observes Michael Wolfe, president of Midboro Management. Adds NYARM's Jones: "The class doesn't teach you how to deal with the technical and practical side of property management. It's really a broker's course."

Arougheti, also an officer with REBNY, feels that the initial license is just a first step. She urges her manager-students to take more comprehensive, management-related courses under the continuing education portion of the law. But there is no absolute requirement that agents take more rigorous management courses; they can opt for less-intense broker-related subjects.

Or, practically, they can do nothing at all. According to many managers and other professionals in the industry, numerous managing agents practice their craft without even getting the required broker's license. For instance, the manager of a 22-unit Upper West Side co-op in Manhattan has operated as the agent for the property for almost a decade with impunity. Jones says that he is not alone. "A great many managers are functioning without brokers' licenses. You can become a manager without one. The law is not strictly enforced."

There are a number of reasons why. Some agents operate under the premise that only the principal in the firm needs to have a license. Others interpret the broker law as not being applicable to them since it states that agents must have a license in order to collect rents. They argue that, because co-op managers collect maintenance and/or common charges, no license is necessary.

Even if both theories are wrong, most managers have little to fear legally. To track down unlicensed brokers, the state relies on complaints from the general public, a notoriously inconsistent source of information. Any reported cases are turned over to state investigators and charges are made by the attorney general's office. The fines are underwhelming to non-existent; operating without a broker's license is a misdemeanor. Theresa Wright, a spokesperson for the Division of Licensing Services, could not report any case of a manager being penalized for operating without a license.

STATUS QUO?
ON JUNE 15, 1994, 72 MANAGERS pled guilty to kickback schemes, with 34 individuals and three corporations agreeing to pay restitution to a special fund established by the D.A.'s office to reimburse victims. One manager went to jail. In mid- and late June 1999, the D.A. announced more indictments: dozens of managing agents, management companies, building superintendents, architects, engineers, waterproofing contractors, and board members. Yet, without the threat of license revocation, there is nothing to keep those who have been indicted and found guilty from continuing to practice.

After the last round of indictments, State Senator Carl Kruger (D-Brooklyn) drafted a bill to require management licensing. Among its features were annual registration of residential managers, judicial review, education and renewal requirements, and a provision for penalties.

Predictably, a Democratic bill in a Republican-run body went nowhere. REBNY, the largest industry trade group, is opposed to Kruger's bill, arguing that the current licensing requirements do not need a major overhaul. But their position seems to run counter to the property management industry serving co-ops and condos. "The Business of Management" survey reveals that 69 percent felt the current broker's license does not meet the needs of property management. Further, 63 percent favored a special license for their industry.

"There are already requirements in place," says REBNY's Davenport. "The goal of the broker licensing law was to be as comprehensive as possible. Our position is that you can make that law better. We are not advocating a new license. Over the years, we have made suggestions for ways to improve the law, but the legislature has not acted. We also feel we cannot support legislation geared towards specific certifications. No one in the industry wants to limit [education] choices."

There are possible financial reasons behind such opposition. "REBNY is against it because the organization is controlled by large real estate owners and they do not want to have to pay for more education or higher salaries," says the principal of a mid-sized management firm. "REBNY has a lot of power in Albany."

"REBNY doesn't want to see [management] licensing go through," states Greg Carlson, principal in Carlson Realty and executive director of the Federation of New York Housing Cooperatives. "When you get down to it, it's a fight over who's going to control the educational piece of the pie. REBNY makes a lot of money on its membership and course fees, for its broker license program, salesman license program, and continuing ed program."

Carlson adds that the rental industry is also against licensing because "they fear it will cost them more money for their property managers, who will demand more as licensed managers."

Davenport says that such arguments are not true. "If there were required management educational requirements, we would be in the forefront of that. There is no conflict of interest [in our opposition]." She adds that many agents do not want the additional red tape or the costs of further licensing. "There are already requirements. We don't want to put people in the position to meet multiple requirements."

There is also the honesty argument put forward by many opponents: you cannot legislate integrity. After all, licenses among lawyers and accountants do not stop corruption there. But only 15 percent of the management executives in "The Business of Management" survey felt that licensing would have no impact on ensuring management integrity, while 35 percent said it would have an impact.

"The broker licensing has a code of conduct. If you're convicted of a felony, you can lose your license; that's adequate," says Gerard J. Picaso, principal in Gerard J. Picaso, a management firm, and president of the Association of Cooperative and Condominium Managers, a trade group. "All those people were caught [in the Manhattan district attorney's kickback investigation], but people still kept doing it, even though they knew an investigation was underway. Bad people do bad things no matter what the consequences."

But can licensing mitigate some criminality? "The threat of eliminating someone's ability to work is very powerful," argues J. Brian Peters, director of management at Rose Associates. "It may, in fact be easier to enforce that than to try and bring a legal case beyond a reasonable doubt that somebody was a crook. We have the lesson of these two rounds of indictments. The district attorney was successful in bringing the indictments, but the actual number of those convicted is relatively low because of the high standard needed for conviction. You would not need as high a standard to revoke a license."

"This is not a panacea which will insure honesty and integrity," admits Cooper Square's Kuperberg. "I agree that you can't legislate honesty. However, with mandatory certification, you can create several positive results. One would be a central registration system of all managers so that if someone is indicted or convicted of a crime, it would be on record."

Currently, after paying a fine or doing jail time, a convicted manager can - and often does - go back to work as an agent and directors are none the wiser. "You have all those people who pled guilty to kickbacks and they're still managing," Kuperberg says. "That's ridiculous. If you lose a license or certification, you lose the ability to ply your trade. That makes it worth keeping, and they may think twice about jeopardizing it."

A management license could also improve the image of the manager as a professional, and could help recruit newcomers to the industry. "If you're an accountant, or a CPA, or an attorney, it means something to obtain a license," Kuperberg says. "You work and study for it. I don't know anyone who goes to college and says I want to be a property manager. Everyone has fallen into it. This would make it more of a profession."

"My personal view is that co-op boards often view the manager as just another vendor," says David Khazzam, vice president at PRC Management. "They try and knock them down on fees, and, as a result, you get the minimum level of fees. The work suffers because the agent is not viewed as a professional. Licensing and certification would help that."

WHAT STANDARDS?
JUST AS IMPORTANT - AND PERhaps the biggest roadblock - is deciding what kind of standards are needed. Licensing requirements should start with the question, "What do managers do and who does this kind of work?" says NAHC's Kleine, who adds that licensing discussions "need to address the 'who.' Should the firm be licensed or the individual? If the individual, which ones: principal, comptroller, property manager, or site manager? If the firm is to be licensed, what are the licensing criteria? Firms don't have education or experience, people do. Firms can't be tested. Firms can't be put in jail. Most licenses of firms simply require that they have adequate insurance. Remember, buildings do not have to hire a firm. They can self-manage and they can staff-manage. And then defining the licensee and the bottom can be slippery. When I was president of a 90-unit townhouse association with a budget of $50,000, one proposal by the realtors in Virginia would have required our treasurer to get a license because we paid her $600 a year."

There are other areas needing definition. Is mandatory certification sufficient or should there be state-supervised licensing? Kuperberg is "strongly in favor of mandatory certification [because] licensing, to me, assumes a government-issued and overseen program along with whatever tests and procedures a governmental agency puts in place. That's a lot of red tape. And every licensing regulation proposed [under state law] ends up being so watered down my 15-year-old son could pass. I don't think the department of state has the wherewithal or expertise to come up with something. There are several existing property manager certifications. One of those should be made mandatory."

Any license should establish a baseline level of competence. "A continuing education requirement would help standardize the basic knowledge and qualifications of people within the field and help establish a threshold level of ability before somebody could be professionally involved in management," Peters says.

"The benefits, especially for co-op or condo boards who come to their roles without real estate experience, is that they know they have a manager who has a minimal education," Carlson says. "Licensing will not cut out fraud, or negligence, or stupidity, but it does tells the boards that they have someone running the property who has, at least, a minimum knowledge of the business."

So, where does licensing stand? Many industry spokesmen insist that it is up to the legislature. The attorney general's office, which regulates co-ops, also says it is waiting for the state lawmakers. But, practically, the legislature bows to lobbyists and the industry's wishes. Until the trade associations get together and agree on a common goal - or there is another series of management indictments - the politicians will probably not act. "As long as they're split, nothing will happen," NAHC's Kleine says. "The turf wars in the industry and the money from lobbyists stop action in such situations."

Such cooperation may be a long time coming. "There is no body that speaks as one, providing unity and dialogue within the industry," reports Khazzam. "Somebody has to stand up and unite; management companies have to get together and have a summit on the industry, but that's nowhere near happening. We are so much at each other's throats."

"If all the trade groups would get together and set up a committee to work it out, something could happen," Wolfe adds. "There should be a consensus. No one can convince me that a broker's license is enough. All these organizations have different interests; if they could get together, legislation could more easily be accepted and passed."

For change to occur, the bottom line is simple: co-op and condo owners need to get mad as hell and say they won't take it anymore. "If boards push for it, more managers will get behind it," argues Khazzam. "But you have a difficulty because of the nature of boards. They are [made up of] volunteers, usually serving one-year terms. Once you educate a board member about why management licensing is needed, he's gone and the process has to start all over again. It's hard, but, ultimately, your client has to make that push."

In fact, what do board members actually know about licensing? An e-mail sampling of Habitat board subscribers found that a slim majority of those polled (52 percent) were aware that managers were unlicensed as managers and that an overwhelming majority (92 percent) said that they favored a management licensing requirement. Ninety-two percent favored state oversight.

The survey also found that many board members - contrary to the views of some in the industry - were aware and critical of the licensing situation. "Any process which would make the actions and capabilities of management more transparent is a step in the right direction," wrote board member Herb Rose.

With such "transparency" in mind, a majority of the surveyed board members said they were in favor of a central registry (91 percent). "As a long-time (20-year) board member, I've seen a lot of building managers come and go and know that trustworthiness is rare," board president Deborah Grayson wrote in her response. "One of our management companies was indicted several years ago. The temptation to stray is so great. Building managers are in regular contact with service providers and may have a stronger relationship with the provider than with the board they are serving. I would like access to information which would let me know if this had ever gotten them in trouble in the past."

Some felt that the training tied to licensing would be the most useful aspect of any licensing proposal. "You would also need some kind of apprentice level and phase-in," wrote Paul Hachmeyer, a board treasurer. "Licensing needs to be based on knowledge and experience, not just paying a fee, and you can't gain knowledge or experience without doing it. A CPA needs to work for a CPA firm, fulfill education requirements, as well as pass a rigorous test before becoming a CPA."

A minority of those polled (8 percent) were against a management license. "Licensing might be beneficial," said board vice president and treasurer Val Wagner, who was not in favor of management licensing, "but it will cost something to do, and I'm not clear on how boards would benefit by having the state issue licenses. As always, the answer is in the details. Without a specific proposal that would itemize the requirements for earning a license, the term of the license, renewal of licenses, and the circumstances in which licenses would be revoked or suspended, I cannot vote in favor of the notion. After all, the board is responsible for directing the manager, and it's a 'hands-on' process by its very nature. How would the state's involvement help our board do its job?"

Even those surveyed who voted for licensing had reservations. Board treasurer James C. Jordan observed: "I am a CPA, and am therefore held to many different standards, including continuing, professional education, licensing, etc. I think it does lead to better service, but the cost, of course, is indirectly passed on to customers/clients. While I think this may not be a pressing issue for larger buildings which, presumably use larger, more reputable management companies, this could be of great benefit to those who use smaller companies."

Many of those surveyed said that management licensing was long overdue. "It is about time," wrote board member Louis DeVito. "We are trying to lock the barn after the horse got out."

Some respondees argued that many boards had to take more responsibility. "Bottom line, it is the co-op board that has the fiduciary duty," wrote Julia Turchuk, a board director. "Maybe they are the ones that should be licensed, registered, and bonded. At the very least, shareholders must elect educated, competent directors. There is probably less of a problem with property managers than with some of the 'self-managed' and/or 'self-dealing' that goes on when co-op management and operations is controlled internally by a few. D & O insurance is no substitute for doing your homework, and a board of directors is no substitute to vigilance on all the issues that affect a shareholder's home. Unfortunately there is no test for common sense, integrity, or ethics for the professionals or the amateurs.

"It may be less of a problem of professional property mismanagement than with expectations," Turchuk continued. "There is no 'big daddy' or 'mama' whose sole purpose is to unequivocally nurture and take care of you. It's a contract for work. It's up to the board and the shareholders to define and understand both sides of any contract and to pay the same attention you would with any other contractor doing work in your home."

In the final analysis, the issues are stark: the manager is often responsible for the financial life or death of a co-op or condo, and must guide a frequently unskilled and untrained, part-time volunteer board. But as long as boards and the industry accept the status quo, managers will not be seen in the same light as doctors and lawyers - as professionals with special skills to offer. Ultimately, everyone must accept that the world has changed: being a manager is no longer simply about collecting the rent check; it is a complex task involving a myriad of tasks that require specialized training.

"In order to qualify to manage millions of dollars of money for clients all an agent has to show is a slip of paper that says he had 45 hours of schooling as a broker," Kuperberg says. "Learning how to list exclusives is not a skill you need to have for management."

 

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