The contract that a condo association Board signs with a professional management company is far and away the most important agreement that the Board must review, negotiate and approve. These contracts typically cover everything from monthly management fees, to financial statement reporting, to after-hours emergency services, to the amount of time the manager will be on property each week, just to name a few. Still, all too often these contracts are only given a cursory review before they are signed and it is only when Board members are dissatisfied with the management company’s performance that they take the time to read the fine print.
It is critical that condominium association Boards review their management contracts in full and negotiate their terms. Many inexperienced Board members may not think they have the leverage to negotiate contract terms but that is assuredly not the case for the following two reasons: (1) most management companies make their money by managing many properties at once, earning only small profits from each, and are therefore always hungry for new business, and (2) most urban areas are saturated with management companies and therefore competition is stiff.
Given the impact the management contract can have on the success of the association, I will provide some insight below into the key aspects of a standard management contract and highlight the details to which the Board should pay the most attention and negotiate if necessary.
Contract Length and Termination Provisions
The management contract will specifically detail how long the contract is in force and what the termination provisions are. While the length of the contract (ex. 1 year, 2 years) may seem like the key factor here, it is actually the termination provisions that need careful evaluation and negotiation to ensure the association’s interests are protected. Termination provisions specify when the association can cancel the contract and how they must provide notice to management of their decision to cancel.
When starting with a new management company, Boards should consider requiring an early termination provision that allows the association to terminate the manager at anytime with 30 – 90 days’ notice. This serves three major purposes. The first is straightforward. If the Board is unhappy with management’s services, they can terminate the agreement and begin looking for new management immediately without having to wait until the contract term is up. Of course, you can always terminate a manager at any time but if you do not follow the termination provisions within the contract, the association may be responsible for paying monthly management fees to the terminated manager until the end of the contract term, essentially double-paying for management services.
The second benefit to a 30-90 day cancelation provision is subtler than the first. Managers are more likely to continue to work hard for the association if they know that their services can be terminated at anytime. Multi-year management contracts with no early termination provision encourage complacency on the part of the manager. If a potential manager refuses to allow an early termination provision, then at the very least the Board will want to negotiate a contract term of at most one year with no auto-renew clause. If the Board is able to negotiate an early termination provision, it is then wise to obtain a long a contract term to lock in the monthly management fee (i.e. avoid fee inflation).
Monthly Management Fee and Other Expenses
The monthly management costs is typically one of the largest line items in an association’s budget so it is obviously important to consider the cost of a management company with which you are considering contracting. Understanding what the monthly fee includes and what services the management company will charge separately for is more important that the actual dollar amount of the monthly fee. These extra charges can be as much as half of the cost of the monthly management fee so it is very important to read the contract carefully, prepare a list of what the monthly fee does and doesn’t include, and estimate what the association’s additional monthly expense may amount to. If the monthly fee is too high for the association’s budget, the Board may have more luck adding extra services as part of the monthly management fee versus attempting to negotiate a lower monthly management fee. Further, the more that the Board can incorporate into the flat monthly fee, the easier budget preparation will be as there is less guesswork involved. I’ve provided a brief overview below of the main services included in the standard management contract and highlighted certain items that are frequently billed separately from the monthly management fee:
This includes items such as copies, envelopes, faxes, stamps and phone calls. Some management companies will absorb the costs associated with the association’s legally required annual mailings (e.g. budget meeting notices) but not the costs associated with Board-directed mailings such as violation letters, newsletters, policy updates, etc. If the manager will be charging for mailings, consider if the management company would be willing to provide residents the option of receiving these mailings by email (when allowed by statute), as this could save the association significant cost.
This includes bookkeeping services, financial statement preparation, paying association invoices, processing monthly maintenance fees from residents, collection efforts, and tax-related items. Management companies typically included the above in their monthly management fee. However, it is important to confirm if there are any additional costs associated with:
- Preparing delinquency letters, pre-lien letters and/ or sending financial information to the assocation’s attorney
- Completing and mailing out Form 1099s to appropriate vendors
- Processing returned check fees
- Budget preparation
- Issuing coupon books
- Preparing estoppel letters
- Providing financial statements to the Board above and beyond a balance sheet and P&L (e.g. check register, bank statements, A/R detail etc.)
- Reserve analysis
- Providing information to the association’s CPA for the purpose of completing tax returns, audited financial statements, etc.
This includes attending Board meetings, completing property walks, bidding out maintenance projects, providing a website for your property, meeting with Board members, emergency preparedness, afterhours emergencies, handling resident complaints/ concerns, etc. Usually all of these services are included in the monthly management fee; however, sometimes there are provisions in the contract aimed at keeping total management hours below a certain threshold. Here are two examples:
- Manager attendance at one Board meeting a month (within certain hours) is included in the monthly management fee but there will be an hourly rate for any additional or afterhours meetings. If your association Board tends to meet multiple times per month or tends to meet on evenings/ weekends, this could be an additional expense.
- Bidding and overseeing all property projects is included in the monthly management fee but there may be a provision that specifies additional charges for projects that will cost above a certain threshold. The idea here is that a $100,000 project (e.g. painting, roofing, paving, etc.) will take much more of the manager’s time than would a small project. If you have large projects coming up, this additional cost would need to be included in the budget.
I encourage all Board members to take the time to read management contracts in detail, and to consider the items outlined above, before moving forward. Management contracts are all drafted differently so when comparing multiple management companies, be sure you are doing an “apples to apples” comparison (including all additional fees) as opposed to just comparing the fixed monthly management fee. Lastly, don’t forget to negotiate! The Board has more leverage than members typically realize.
I hope you have found this discussion of management contracts helpful. If you need any assistance in reviewing a management contract, feel free to email me and I would be happy to take a look.