Co-ops and condos are managed in one of two principal ways — proactive and reactive. Business schools refer to these methods as, respectively, "Management by Objective" and "Management by Emergency." Which way applies to your property?
Here are three actual, all-too-real examples of how things can go wrong when your board doesn't get the information it needs to keep track of how well — or not — your property is being run.
The first scenario involves newly constructed homes, organized as a homeowners association with two condominium sections. The management company was sole signatory on checks to pay invoices. The homeowner board members sensed something was wrong, but couldn't verify their suspicions since they weren't getting a management report with the information they needed. When the homeowners eventually gained took control of the board from the builder, they hired a new management firm — and the nightmare came into light.
The homeowners association had been billed from the beginning, as had the Condominium Section 1 owners — but never Condominium Section 2. Bank accounts were never opened for the condominium sections, and payments never posted. Invoices were paid from homeowners-association funds, and the association's income and expenses were commingled with the condominium sections'. Billing got skipped for two random months within the first year-and-a-half. Some the homeowners' monthly common-charges checks, amounting to thousands of dollars, weren't deposited for as long as a year.
The builder had to hire an attorney and a forensic accounting firm to set things straight, acknowledging the previous management company's deficiencies.
The management company's monthly report summarizes all the financial and maintenance services that the company is providing you. It is the culmination of the manager's monthly efforts.
The second scenario involves a condominium that switched management companies three times within a three-year period. The management companies were sole signatories on checks to pay invoices. Astonishingly, the last two management companies did not maintain records. A general ledger did not exist, and there was no backup for income and expenses. The audit trail was lost. The board knew something was wrong but couldn't identify the problems because the management report was inadequate.
Maintaining accurate records is of the utmost importance to document financial activities at a property. Quality record-keeping includes the following components:
• Accounts payable files, segregated by vendor to include a purchase requisition, invoice, signed delivery receipt and backup copy of the check for every payment.
• Accounts receivable data, updated daily via a wide area network connected to the bank.
• Accurate cash balances, available at all times.
• Individual unit files, established to contain every correspondence and transaction with residents.
A management company must keep accurate records to service a property. Records provide historical data essential to property maintenance. They also provide a log of legal matters and correspondence among the board, the management company and unit-owners. The management report is a reflection of the way the management company maintains records. Nonetheless, there is no substitute for a board's visit to the management office.
The third scenario is of a cooperative with a sponsor who held 45 percent of the property's unsold shares. The management company was sole signatory on checks to pay invoices. When the sponsor sold the unsold shares to a reputable investment group that brought in new management, it immediately became apparent that the budget was inadequate, and there was a shortfall of funds needed to meet expenditures. The previous management company hadn't paid invoices for several months, requiring an immediate special assessment to raise funds. The board had no idea what was going on since it never got worthwhile management reports.
Visit the management company to ascertain for yourself that it has accounting and finance staff with systems of checks and balances to protect owners from misuse of funds. The way the accounts-receivable department processes payments and the accounts-payable department pays bills enables the managers to meet their goals. Support also comes from staff accountants specifically assigned to properties to prepare and review financial reports. This further enhances the managers' ability to serve the community. The qualifications of the accounting and financial staff and the ratio of staff to properties managed are indications of the quality of the management firm.
The monthly management report should be presented in a binder divided into major headings. The manager should then lead the board through them: financial report; legal report; correspondence; miscellaneous; and action items that require a decision by the board. This way, boards can easily review the life of the property over the past month and fulfill their true function as a decision-making body. A professional presentation ultimately expedites meetings.
A board that receives comprehensive management reports can better plan for and control costs. Board members should read the management report cover-to-cover before a board meeting and call their property manager with any questions beforehand — this way, if the property manager doesn't have an immediate answer, he or she can research it in time for the meeting.
Following these guidelines results in efficient management, productive board meetings and no need for "Management by Emergency."
Adapted from Habitat February 2007. For the complete article and more, join our Archive >>
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