Money is tight. Lawyers are expensive. Can you cut costs without cutting essential services?
That’s the question many boards may be asking as they face the beginning of a new fiscal year.
Bottom line: attorneys’ billable hours, like everything else, have gone up – although not as significantly as you might think. In Habitat’s 2003 attorney survey, one large firm reported that partners charged an hourly rate of $300-$350; in 2012 that had gone up to $375-$400. Associates rated $150-$250 an hour in 2003; by 2012, they were getting $205-$230. Professionals say that increased competition has kept prices from rising significantly. “There are a lot more firms specializing in cooperative and condominium law than there were 20 years ago,” says Richard Siegler, a partner at Stroock & Stroock & Lavan. “That means there are tremendous pressures to keep the prices low.”
Still, many boards don’t see it that way. They regard legal charges as a big cost that must be reduced. Siegler cites an example: one large co-op regularly asked him to come to the annual meetings. “It was felt there was an advantage to having counsel explain the positions of the board, and answer questions shareholders might have about legal issues,” he explains. “This year, they decided to do without the lawyer and save $500 to $1,000.”
Yet is such cutting wise? Not if you ask an attorney. “What we charge depends on the experience an attorney brings to the table,” notes Eric Goidel, a partner at Borah Goldstein Altschuler. “[My competitor] may charge you half the price I charge but take twice as long to do the job. You can’t just cut blindly.”
But others say the situation is not so cut-and-dried. “Managing legal costs is not simply a matter of cutting costs to the lowest possible level,” says John W. Toothman, president of the Devil’s Advocate, a Virginia-based firm that has advised housing associations all around the country (including in New York) on ways to lower legal costs. “There are better ways to keep fees down.”
Where to Start
Savings should begin when you hire a firm. Toothman says boards should treat attorneys no differently than how they treat other contractors who are seeking employment: they should be subject to competitive bidding. That doesn’t just mean getting a schedule of hourly rates for partners and associates (although that’s part of it). You also want to examine the financial arrangements. Most firms, explains attorney Tara Snow, a partner at Novitt, Sahr & Snow, offer at least two ways to bill: hourly or monthly. In the former, you get billed every time you call. In the latter, you pay a monthly retainer, which usually covers all calls, and provides a few free visits by the attorney. It does not cover “extraordinary expenses,” such as litigation, contract negotiations, closings, or refinancings. On those expenses, you’re back on the hourly clock (although you usually get a significant discount).
The hourly rate “basically gives them an incentive to drag things out,” argues Toothman. “You are rewarding them for quantity, not quality of work, and with the monthly retainer that is often an incentive for them to be efficient.” Attorneys counter that argument by pointing to the increased competition as a check on “dragging things out.”
The flat rate, or monthly retainer (not offered by all firms), may help solve one problem: boards being overly frugal when talking with legal counsel. Boards with the hourly rate often try to save by keeping their conversations brief. For instance, attorney Kenneth Jacobs, a partner at Smith, Buss & Jacobs, points to board members who call and try to get him to give them “yes or no” answers. “In an effort to save money, they send you an e-mail in which they might say, ‘Can we assess the building $800,000, payable in March?’ and the correct answer is yes.” But this is being “cost deficient,” says Jacobs, noting: “I wouldn’t be doing my job unless I said, ‘Why are you asking this question?’ You can’t answer in a vacuum.”
It is better, say lawyers such as James Glatthaar, a partner at Bleakley Platt & Schmidt, to involve your counsel before you get to the crisis point. The money you spend up front is nothing next to the money you’ll pay in the back end if an attorney has to clean up a mess. Explains attorney Richard Klein, principal in the Law Offices of Richard Klein: “With objectionable conduct issues, with quality-of-life issues, with delinquent shareholders, sometimes I send a letter in the beginning before the person owes thousands and thousands of dollars. At that point, we can work out a payment plan. That’s better than waiting until the person is too far behind the eight ball.”
The board should also ask for a proposed budget of annual expenses, with as much detail as possible. Attorney Geoffrey Mazel, a partner at Hankin & Mazel, says that preparing sample budgets is possible. “We do monthly budgets to give them an idea of cost,” he reports. “It’s easier to do when you have them on a monthly retainer, harder to do without one. But I can do it. We’ve been doing this long enough so we know where the possible [extra] expenses are. We ask, ‘Are you refinancing? Are you doing a lot of capital improvements?’ Things like that help give us a sense of what it will cost.” But in either case, it can be only a rough estimate.
Beyond budgeting and payment structures, you should assess how willing attorneys are to cede work to management firms. Managers are already doing some of the tasks previously done by lawyers, most notably by handling closings. There are other areas they are taking on as well. Managers often write the initial letters to residents about arrears problems, for instance, while disputes between two neighbors can (and probably should) be dealt with by the manager.
Having the manager coping with these matters in the early stages tends to keep the issues low-key. As soon as the attorney enters the picture, the stakes are elevated.
Veteran managers who have dealt with legal problems previously in other properties argue that they can use that experience to advise owners and save on the lawyer’s salary. They say they sometimes can reuse and adapt letters written by an attorney for one property for another property with a similar problem. But a number of attorneys warn that there is a potential danger in that because similar-appearing legal situations may have subtle nuances that do not translate from case to case.
Toothman, of the Devil’s Advocate, admits that legal nuance is a valid issue, but that boards should be able to tell when a lawyer is being too picky. He cites a recent case in Florida (see box, at right), where attorneys are insisting that association boards consult with lawyers for every little thing. “The theory is that when reading your own bylaws, you have to have a lawyer interpret what it means to have a quorum, which is absurd,” says Toothman, a lawyer himself. “There are some issues that are clear in your rules; you don’t need a lawyer for everything.”
Talking With Counsel
Boards can also save money by limiting the board’s access. Jacobs suggests that two board members should be designated as the liaison with the lawyer. Two is a good number, he says, because it “keeps things honest. The liaison cannot tilt the advice to match his prejudices.”
It also can be beneficial to have a lawyer as liaison because he or she brings a “more realistic” view of what litigation is about,” says Jacobs. “If a board is saying, ‘Let’s sue,’ it helps to have someone on the board who can say, ‘Let me tell you what really happens in a lawsuit.’”
Then there’s the internet. A useful tool, it can also be a potential quagmire for boards. “The internet can be a tremendous source of information,” notes Steve Troup, an attorney and partner at Tarter Krinsky & Drogin, who adds a warning: “But as many times as not, the information that they get may not be complete. A little knowledge can be dangerous.”
In the end, what should you look for when you try to cut costs? That may be the wrong question. Mazel says it is a matter not of money but experience. “We came across a building that had spent three years in litigation,” says the lawyer. “They had apparently never talked much with their attorney beforehand, trying to save money. If they had, that case could probably have been solved three years earlier. There should be a greater concern than how much it costs. Because at the end of the day, you can really cut costs by never calling your attorney at all. That way, you’ll have no legal fees. But that doesn’t mean you don’t have legal problems.”
Florida: Attorneys vs Managers