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Sunday, November 23, 2014
November 2014 View Previous Magazine Features
 

Focus on Fees
By: Nena Groskind

Making Management Fees Competitive and Profitable Isn't so Hard -
Persuading Community Associations to Pay them Can Be


The board members reviewing proposals from community association management companies usually pose two key questions: What services do you provide and how much do you charge for them? Those aren't the only questions boards ask or should ask, but they will almost always rank high on the list.
Management companies pitching new clients or renewing the contracts of existing ones focus on the same issues (their services and their fees) but they phrase the questions differently: How much do I have to charge to provide the services your want and the quality you expect? And how can I structure a fee that is both competitive with what other companies charge and profitable for me?
It's not easy, to put it mildly," David Abel, CMCA, senior manager at First Realty Management, responds, talking mainly about the profitability challenge. "This is not a profitable business," he adds. Few managers would challenge that conclusion.
"I'm still trying to figure out the profitable side of that equation," Robert Keegan, CMCA, AMS, PCAM, vice president at R&E Associates, Inc. in Kennebunk, ME, laughs. "But if you have the better product, you hope people will pay for it."
There are exceptions, he agrees - boards that focus exclusively on the bottom line, selecting one manager over another based entirely on the size of their fees. But he finds board members on the whole savvier about quality and cost than they were in the past and willing to pay more for higher quality service.

Explaining the Value Proposition
The challenge for management companies is explaining that value proposition. 'To the uninitiated, it seems that we all do pretty much the same thing," Robert McBride, CMCA, AMS, PCAM, president of The Dartmouth Group, Inc., concedes. For that reason, he says, "We can't just tell clients what we do for them; we have to tell them what we give them. It's not what we do," he adds. "It's how we do it."
In McBride's explanation, it's the experience and expertise of his managers, and the corporate support (administrative assistants, accountants and technology) behind them that distinguishes his company from those that may charge less. It's the difference, he says, between "professional managers," who derive most of their income from management fees and "facilities managers" who generate most of their revenue from maintenance and related services.
If he were drawing a picture, facilities managers would be "men in trucks" driving from site to site and solving problems as they arise; professional managers would be driving cars, parked for extended times at the properties they oversee.
"If I'm making all my money on maintenance, that's where my overhead and people are going to be," he explains. "I'm not going to charge you much in fees, but I'm also not going to be [focusing much] on management services." Facilities management firms, McBride says, tend to have "a very high property to manager ratio." Management firms that put their emphasis on management will set a lower cap on the number of properties they put in their managers' portfolios, so they can devote the time association clients need.

Doing the Same Things Differently
"If I give my manager 6 properties and another manager has 12, what does that tell you?" McBride asks. Both managers will perform essentially the same tasks, he says, "but how will they perform them? Both will meet with the board, but how often, and what will they do in those meetings? Both will communicate with the board and with owners, but how will they communicate and how accessible will they be? The management fee comes down to time," McBride says. "How much time do you need and how much time am I going to give you?"
The logic is clear, but not always persuasive for boards concerned primarily about the cost of the services they will receive. "I have a deep bench of experienced managers who have no more than five or six properties in their portfolios. I know we'll provide better service than the manager with 15 properties, but how do I educate a client to understand it's in their interests to pay more for it?" Abel asks. "I don't know any board members who will say they want to pay less to get lower quality service. They all want great service." What is often lacking, he says, is the willingness to pay for it.
The solution, if there is one, is to deliver the value message clearly, consistently, and repeatedly, C. Jerry Ragosa, president of The Niles Co., Inc. AMO, believes. "You can't assume clients get it," he says. "You have to keep repeating it," to new board members hearing the message for the first time and to experienced ones who need to be reminded of it. That's especially true today, Ragosa says, because boards are "extremely cost conscious. We're finding we have to spend more time explaining the value we add as managers. Our experience, our industry knowledge and our vendor contacts all accrue to the association's benefit over time." Sometimes boards accept and welcome that message, Ragosa says, "and sometimes they don't. That's the yen and yang of dealing with people."

What the Fee Covers
Management companies may be struggling to varying degrees and in varying ways to explain their value proposition. But they seem to be doing a better job today of defining clearly what their fees cover and what they don't, no longer assuming (or allowing clients to assume), as they did in the past, that a fixed management fee can be stretched to encompass every task managers might be asked to perform.
Two decades (or less) ago, the response to almost any request for any service was "of course we can do that." Now managers are far more likely to add, "But we'll charge an additional fee for that additional work." Most industry executives use McBride's definition of services outside the scope of the management contract as those that are "non-recurring, unexpected or unpredictable. I don't know if you are going to make 10 copies or 300, or if you're going to replace 1 roof or 20," he says. "Those are variable costs and we charge for them."
The important point, managers agree, is to explain clearly - in the contract proposal and in the contract itself " what the fee covers and what it doesn't. Those explanations have become more precise and more detailed - specifying, for example, both the number and duration of the meetings managers will attend. Keegan's contract calls for a two-hour limit on board meetings. If they occasionally run longer, "we don't nickel and dime our clients," he emphasizes. But if longer meetings become the norm, "we charge for the extra time."
Specifying what the management fee covers - and what it doesn't - "makes it easier to charge for the extra servicesˇ± when boards request them, Keegan says. But not always.
Doing the Right Thing
A community association Niles managed decided it did not need the construction management services the company would provide for an extra fee and so undertook a major construction project without that assistance. The project quickly "went sideways," Ragosa says, and the company ultimately stepped in to clean up the resulting mess, reducing by half the extra $120,000 in additional construction costs the association was facing.
"We didn't charge them for our work," Ragosa says. "But we couldn't just walk away. The job had to get done. We have to protect the association under all circumstances." Does that mean this board will request the service and pay the fee for it next time? Ragosa laughs. "We'll have to see," he says.
In addition to charging for construction management services (which seems to be an industry norm), many firms also charge for managing insurance claims and for work on a full-scale audit. These tasks "are time-consuming and labor intensive," Keegan says. His firm also now charges clients for mailings other than the one for the annual meeting.
"Mailings were getting out of hand," he explains. The contract fee used to include a specified number of mailings, "but when boards went over that limit, it would mess up their budget." Keegan says. Now, he is encouraging boards to use e-mail as much as possible. "That is less time consuming for the manager and less expensive for the association - a win-win for everyone."

What You Do!
Like most management contracts, Keegan's details the responsibilities of the manager, but it lays out the responsibilities of the board as well, specifying, for example, that the president establishes the agenda and runs the meeting, the treasurer reviews the financials and summarizes them for the board, and the secretary takes the minutes.
This conveys an important message to board members and owners, Keegan explains. "The trustees need to have ownership. This helps them realize that they are running the association. And owners, too, see that it is the board and not the manager pulling the strings for the community."
Deciding what the management fee should cover is fairly straightforward; deciding what it should be for any particular client is more complicated, because properties differ in their needs and the expectations of their owners, and because management companies have to consider both what their competitors charge and what their clients are willing to pay.
Dartmouth's McBride considers many factors in structuring his fees, but the size of a property is not among them. Whether the property has 50 units or 250, he explains, the manager will spend the same amount of time preparing for board meetings and the administrative structure behind the manager will also be the same. The per ¨Cunit fee will be different for smaller and larger communities, "but that's just the math," McBride says. It's not the structure of the fee. The variables that do make a difference, he says, are the complexity of the site, the amount of a manager's time it requires, and the expectations of the board and the owners.
The presence of an on-site manager also affects the fee. If a complex site has a manager on site, it will require fewer administrative resources and less of a portfolio manager's time than a smaller property with high expectations but no on-site manager, McBride explains. "We will have to spend more corporate resources to achieve the same quality of service [for the smaller property]." I in many cases, he says, "we can't be as competitive for a 50-unit property with high expectations and no site staff as we can be for a 200-unit property with on-site staffing."

Something Has to Give
When confronted with a board that has high expectations, complex requirements and a limited budget for management services, McBride will tell them: "You need this much of a manager's time. If I lower my fee, something has to give," and when it comes to hiring experienced managers, who can provide quality service, McBride is emphatic: He's not willing to give at all. "What I pay people is fixed," he says.
Keegan responds similarly when boards say they don't want to pay more than "x" for management services. "I tell them best of luck with that," he says. "I'm honest - I say we can't do the work you need [and provide the service you want] for that fee."
This board would hear a version of the same speech from Abel. "If I lower my fee, I'll have to make that up somewhere" - by paying managers less or reducing the time they spend on the property. But it's hard to make board members understand that they will lose in the long run if we don't charge them enough," he says. "The managers we hire will be less experienced, turnover will be high, and the quality of the service we provide will be lower. If we cut our fees we're really negotiating with ourselves," Abel continues. That strategy isn't sustainable, he says, and the results aren't desirable for the company or its clients.
As Keegan and Ragosa both noted earlier, some boards get that message and others don't. When Abel requested a 5 percent increase recently to renew a contract with an existing client, a board member complained: "I didn't get a raise this year, why should you?"
Abel responded by trying to explain the value of the service his company provides. He reminded the board that four years before, when a light fixture had to be replaced, "instead of spending five minutes" arranging to have an electrician do the work, he spent more than 20 hours researching LED lighting, laying the groundwork for the community to capitalize on cost-saving technology that will reduce its lighting bill by half. "I could have just made a five-minute phone call and you would never have known the difference," he told the board, suggesting that they "think about that" when his contract comes up for renewal again.
How did the board respond? "The room was silent," Abel says.

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