Too pricey? Too large?
Too small? Are we the right fit? Before entering the
management marriage, boards need to examine the issues...
It wasn’t long after Agnes Mlott’s building on Manhattan’s Upper East Side converted from a rental to a condominium that she, as the board’s first president, realized something was rotten. The monthly financial statements provided by the management company were vague. The company itself was expensive. And when board members dug a bit deeper, they learned that they were being quietly fleeced.
It was time to take one of the biggest and most precarious steps a condo or co-op board will ever take. It was time to change management companies.
Many people with experience in the world of New York co-ops and condos will tell you that hiring a management company is a bit like getting married. And before you get married, they advise, it’s always wise to find out as much as possible about your spouse to be.
“It’s a big step, so look at all your options before you make a change,” says Greg Carlson, executive director of the Federation of New York Housing Cooperatives & Condominiums, a 55-year-old advocacy and education group.
What are the steps you need to take to ensure that you find the right partner and that your management marriage doesn’t end in divorce?
First, look for the red flags that warn you it’s time to switch agents. Carlson says the three most common complaints about managers are that phone calls go unreturned, to-do lists keep growing instead of shrinking, and the board and the manager have personalities as compatible as oil and water.
Other Red Flags
The manager provides vague financial statements (without original invoices).
“When we first converted to a condo, we didn’t know anything and we were just trying to get our ducks in a row,” recalls Agnes Mlott, a self-employed lawyer who has served on the board of the 138-unit condo at 222 East 60th Street for all but three of the past twenty-three years. She’s now the board’s president. “When we finally got settled, we started asking questions.” And the red flags started fluttering. “The most important thing to me is finances,” Mlott says. “But when we got our monthly financial statements [from the management company], we were just seeing lump figures – for a plumber, a carpenter, whatever. We weren’t seeing the original bills. When we asked to see the bills, I noticed that we were getting billed for things that the sponsor was using to fix his units, like new toilets and new floors. We had to demand our money back. Plus, the management company was too expensive.”
The manager makes surprise or unauthorized expenditures.
You don’t want surprises in your budget. If you’re not worried, look at the sobering case of the Normandy, a 250-unit West Side co-op in Manhattan. Some years ago, the board discovered all sorts of expenses made out for the benefit of the building’s longtime managing agent. There were his car loans and automobile repair charges ($11,878), personal
attorney fees ($32,318), the costs of a caterer for his wedding ($2,500), computer equipment and office supply expenses ($26,387), and, the topper, a miscellaneous “petty cash fund” over which the agent had sole check-signing power and about which the board had apparently been unaware ($85,280). Needless to say, he was dismissed (and sued).
The manager loses interest.
“I was surprised that after a while the managing agent who had served us so well suddenly stopped serving us well,” recalls Paul Ross, who served on the board for ten years (three as president) at the 234-unit co-op at 720-730 Fort Washington Avenue in the Washington Heights section of upper Manhattan. “There was a drop-off in service over a number of years. I think there’s a desire by boards to stick with a managing agent because he has an institutional memory. But managing agents get bored, and their performance can slip. Boards should keep agents only for three or four years.”
Finding the Perfect Partner
Once the divorce is made final, what steps should you take to find the perfect partner? Among them:
Compile a list of possible management companies.
What’s out there? Management companies range from small – with a single principal and a small support staff – to huge – with several principals and more than a hundred people on support. Compile this list by talking to your professionals (lawyer, accountant), by word of mouth, by reading such publications as Habitat, and even by looking into nearby buildings to see who manages them.
During Ross’s tenure as president, the co-op decided to get rid of the manager, who was also the sponsor, and bring in someone new. “We invited [shareholders] outside the board to come up with suggestions. We also did research in trade publications, looking at both articles and advertisements. We also spoke with the people at the Council of New York Cooperatives & Condominiums.”
Board member Ruth Shoenthal uses the word-of-mouth technique. She has worked both sides of the street. Since 1993, she has managed co-ops and condos for General Property Management Associates, and she is now treasurer of her 132-unit co-op board at 127 West 96th Street, where she has served for 16 years (including 10 as president). In her tenure, the co-op has gone through three management companies before hiring the current one. “We all have friends who live in co-ops and condos, and [when we were looking] we asked around,” she says. “If they were happy with their management company, we put it on the list.”
Winnow it down by price.
Money matters – despite what some argue. A property that can only pay $1,000 a month has fewer options than one that pays $5,000 to $10,000 a month. As a rule of thumb, Carlson says, management companies cost an average of $300 per unit per year in the outer boroughs, and from $400 to $450 per unit in Manhattan.
“You get what you pay for,” Ross warns. “You have to understand market rates and be flexible. One of the main jobs of a board is to get a crack professional team. If you’re weak in any one area – in management, or accounting, or your lawyer – the entire co-op is going to suffer.”
He adds: “We ended up spending more for our new management company than we’d budgeted for the previous one. We decided we were not in the business of going for the cheapest solution. We wanted the right solution and we were willing to pay for it.”
Going with a large firm proved to have its advantages. “Sometimes when we needed some informal legal advice, we were able to ask the lawyers they had on staff. We got competent legal advice that way without having to use our own lawyer on the clock. Also, the management company was able to buy things in bulk, which saved us money.”
Ask for a list of all the buildings the firm has managed – not just the ones the manager selects. Then call them – you may get lucky. Recalls Ross: “Some people think checking references is a useless exercise, but that’s not always true. You have to get the person on the other end of phone line to relax so they’ll speak their mind. We made phone calls to the candidates’ references. Some of them blabbed; in one case we found that the management company had good business skills but they didn’t have the people skills or the management skills. They were poor managers of buildings.”
“You can read between the lines a lot,” adds Jerry Sherwin, president of the 116-unit co-op at 181 East 73rd Street. “We checked the references ourselves, we asked board people how the managing agent handled major projects as well as how they worked with the super and the day-to-day staff. We also asked the agents point blank why certain buildings didn’t work out for them.”
The board went deeper with the finalists, conducting a background check that included a Dunn & Bradstreet investigation of the managing company’s finances, plus background, credit, and criminal record checks of manager candidates. “It may sound like overkill,” Sherwin says, “but the better-safe-than-sorry rule applies here. You’ve also got to go with your gut feeling because personalities are involved.”
Adds Shoenthal: “When we switched management companies, we did not do credit or criminal background checks. We’re not a white-glove building, so mainly we were looking for a company that was compatible with us. Of course, we needed a company with a good back office, but more important was finding a manager who would react well with our building. A board has to do its due diligence, just like when you buy into a co-op. You have to talk to all the management company’s references and probe them for as much information as you can get.”
Look at proximity questions.
How close is the manager’s office to your property? Proximity can mean more frequent visits and better service. “It’s helpful if the company is handling other buildings in your area because it means they’ll already have an agent traveling to your area, and as a result you’ll get better service,” Ross says. “You’re hiring one-fifth or one-quarter of a person, so that can make a big difference.”
More importantly, how many buildings does the site agent manage in your neighborhood? “If the manager has widely scattered buildings,” notes Sherwin, “that’s bad management.”
Visit the management company’s offices to meet the back-office staff and inspect the facilities.
“The board’s most important relationship is with the person who does the day-to-day work,” suggests attorney Joseph Colbert, a partner at Kagan Lubic Lepper Lewis Gold & Colbert, which represents some 150 buildings in New York City and the tristate area. “But I think the number one thing a board should do is go to the management company’s offices and see who they’re going to deal with in the back office – the budgeting, the billing, the maintenance collecting. Also, you’re going to want to meet the manager’s assistants. Who are they? Are they personable? These relationships are very important. Know who’s going to be serving you.”
Sherwin’s board took a trip to look over the company’s offices, “but,” he says, “it’s almost like an army inspection because you know they’re going to be on their best behavior. Even so, you should take the time to make that visit.”
Be sure the board gets to interview the actual site manager not just the principal.
“Most initial interviews are with the management company’s salesman,” Carlson says. “Everything sounds so rosy. Once you pick your finalists, you should interview the person who’s going to be in charge of your building. If that chemistry doesn’t work, the marriage is not going to work.” For one co-op that was considering her firm, Lynn Whiting, director of management at the Argo Corporation, reviewed thirty different names of possible site managers and then narrowed the candidates down to three who might click with the board.
“The critical thing is you want to meet the people who own the company and the person who will be doing the day-to-day work managing your building,” Sherwin says.
Trust your first impressions.
Shoenthal is very firm on this point: “Go with your gut. If you feel a person is giving you a line, he probably is. You also have to find out if the information they’re imparting is accurate. It’s very important that there’s a good comfort level between the board president and the manager – but equally important is the way the manager deals with the rest of the shareholders or unit-owners. If the manager isn’t accessible, there’s a major problem.”
A Case Study
The board at the massive Fordham Hill co-op in the University Heights section of the Bronx followed much of this advice almost to the letter – and saw it pay huge dividends. In the spring of 2007, shareholder unrest at this 1,100-unit, nine-tower co-op near the Harlem River led to the purging of the entire board of directors and the election of an all-new nine-member board. Among the new arrivals was Laurrinda Hatcher, who’d worked in the financial side of a commercial real estate management firm before giving birth to her first child in October 2006. At 41, this native Texan is now a stay-at-home mom and vice president of Fordham Hill’s board.
“The previous board didn’t really take care of the co-op’s finances,” she says. “They made a mess of things. We also had a property manager who’d been here a long time. He had a lot of people skills, but, as for the business side, he didn’t have the experience we needed. This is a business, and that’s something a lot of shareholders don’t get.”
When the property manager gave notice, the board got busy hunting for a management company. For starters, the board talked to Hatcher’s former employer and got the names of several reputable management companies. Individual board members added other candidates to the list.
“We solicited proposals from all the companies,” Hatcher says, “and then our executive committee looked over the proposals and narrowed it down to three. We invited them in to make presentations over a two-night period. We wound up with two top candidates, and I personally checked their references. While I was doing this, they invited us to their offices to meet the [back-office] staff.”
In November 2007, the decision was made to go with the one that went the extra mile of giving the board a tour of several properties it managed. The board members liked what they saw, but they still didn’t know who would be on their new management team. That was when the winning firm got busy. “[She] went through [a collection of property manager] resumes,” Hatcher recalls. “Then she narrowed the candidates down to three and we interviewed them.”
And so today, Fordham Hill co-op’s board is working in harmony with its hand-picked, on-site management team: a property manager, assistant property manager, administrative assistant, and part-time clerk.
“I love it,” Hatcher says. “It’s amazing how much you can get done when there’s a whole company behind you with a lot of integrity.”
Once the new team came on board at the first of this year, though, the board wasn’t free to fall asleep at the wheel. “Getting the right managing team doesn’t give you a license to be uninvolved,” Hatcher says. “You’ve still got to do your homework. And let’s face it, being on a board is a lot of work. We stay on top of things. We question everything.”