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A communications turnaround.

A Communications Turnaround

Because we in property management are customarily involved in the mechanics of management - HVAC contracts, grounds maintenance, deferred maintenance, budgeting, accounting procedures - we tend to measure our successes and failures by the results of our efforts in the physical aspects of management. Yet, the management of people - staff, vendors, and tenants - is equally vital to a property's performance.

This article explores the importance of people management in effecting the turnaround of a troubled condominium. Such properties often change management hands because of the failure of management to recognize that arms-length, mechanical management of a property is simply not sufficient to guarantee success. Nor is it sufficient to merely resolve the immediate problems of a community while ignoring the fundamental causes for these problems.

Very often, the source of a community's problems can be found in the people who comprise the board of directors. And just as often, the eventual solution to the community's problems also involves people - in this case the members of the council of co-owners, who were willing to work with the management company to resolve the difficulties.

The challenge

In June 1986 the president of the board of directors of Sprucetree Court Condominium Association called our offices requesting a meeting. The board president attended the meeting, accompanied by two other members of a nine-member board. The meeting was pleasant, but there was an air of conspiracy that gave warning to more than a troubled property.

We agreed to make an independent inspection of the physical plant, after which a proposal for management would be presented to the full board of directors.

The physical plant

The community of Sprucetree Court is located at the southern end of Alexandria, Virginia. It is comprised of eight buildings on approximately three acres of ground. There are 105 apartments in the complex, only 41 of which were owner occupied.

Adjacent to and somewhat concealed by commercial properties, the community proved to be a very pleasant oasis in an otherwise commercially oriented area. Tree-shaded grounds, a very handsome and well-maintained swimming pool, ample parking, substantial buildings, and ready access to public transportation were some of its desirable characteristics.

A lengthy examination of the property revealed the other side of the coin. Hallways and stairways were dirty. Lighting was in general disrepair. Fancoil units in the common areas were rusted, and their cabinets were in disarray. Grounds appeared to be reasonably cared for but were littered with bottles, cans, used diapers, and just about every other form of debris. While few things appeared to be actually abused or broken, there was a general suggestion of studied neglect.

We knew that the community had central heat and central air conditioning. An inspection of the mechanical room revealed a boiler, oil-fired, of truly majestic proportions with the responsibility to provide general purpose hot water and hot water heat throughout the community. It showed the effects of 25 years of operation. Chillers were grease smeared and virtually concealed by tools and spare parts, giving indication that their operation was forced. Ground areas adjacent to the water tower were lush and overgrown, attesting to an inordinate amount of leakage.

Plaster ceilings in storage rooms were sagging from moisture and were riddled with holes made for access to leaking pipes. Items of storage were abandoned in the passageways, and virtually all of the storage areas were little more than concentrated fire hazards.

Financial affairs

Examination of the budget revealed that the community had the budgetary tools for a successful operation. It had engaged the services of several management companies in a relatively short period of time, apparently satisfied with none. It was supported by a competent pool contractor, by a licensed and recognized grounds maintenance company, and by a mechanical contractor said to be competent to perform.

On paper, all services were in place and reasonably priced. A review of expenditures revealed that a great deal of money had been spent maintaining and repairing the heating and cooling equipment. There was no evidence that compensation for accidents to these equipments had been sought from insurance carriers; yet quite adequate insurance coverage was in place.

Condominium fees were found to be reasonable, and aside from two significant delinquencies (out of 105), there was absolutely no evidence of routine delinquencies in fees. In addition to that rather astounding revelation, it was discovered that the association had savings in excess of $160,000 in proper banking facilities.

The bylaws

Clues to some of the problems that the community was facing were discovered in the declaration and in the bylaws. The only restrictions imposed upon absentee owners was that their units were not to be used for hotel or other clearly transient purposes. There was no minimum lease period. There was no provision for acceleration of fees in the event of a deliquency, thus explaining the two long-standing accounts in arrears.

The bylaws called for a nine-member board, which was probably too many to function effectively. There had been no increase in condominium fees for approximately five years, and indeed with no apparent intent to avoid deferred maintenance, there was little reason for an increase.

Assumption of

management control

After preliminary inspections of the physical plant and the documents, our company asked for a second meeting with the board of directors. Note the rather unusual format in the development of this alliance. One would normally expect a company to be invited to inspect the property and to submit a proposal for management. That might be followed by a presentation with the board of directors if the proposal had been well received, and in due course the management company selected would be notified of its new duties.

This case was different. The president of the board was contacted, and it was agreed that there would be a second meeting. The meeting was set at our offices, and the same three board members who had been present initially were in attendance.

The first question asked of the board was the specific reason for their decision to change management companies. We were informed that the incumbent had given notice of its intent to relinquish management on the grounds that it could not deal with the president of the board.

In the course of the conversation it was stipulated that if our firm undertook management of the community, we would require virtually emergency authority in the first six months to effect agreed upon changes. After a three-hour meeting, the members of the board left our offices satisfied that they had found a management company that could carry out their wishes.

Our staff was left with the clear impression that it was about to embark on a voyage in wholly uncharted waters. It had agreed to undertake a task at which other reputable managers had failed, and one which its immediate predecessor had summarily abandoned, apparently with good reason.

A management agreement was drawn and ratified in August 1986. It was agreed that we would assume management control on the first of October, inasmuch as the incumbent management company had indicated its intention to relinquish management effective September 30.

Contact with the incumbent management company was pleasant enough and in every respect professionally made and received. It seemed business as usual as we prepared to assume management control.

The plot thickens

On the 1st of September, there was a frantic telephone call from the board president. There had been a massive failure of the boiler, the community was without hot water, and the mechanical room was afloat in oil and water.

After a quick call to the incumbent management company, who wanted no involvement in the situation, we assumed immediate management control.

Approximately 48 hours and $18,000 later, some semblance of both order and function were restored to the boiler room. Insurance carriers were notified, and they responded admirably. A special, emergency meeting of the board of directors was called, and once again assurances were given that great latitude would be afforded in terms of aggressive action and expenditure of funds in the first six months of new management services.

The month of September was a busy one. Knowing that the biggest task was one of discovery, the first line of attack was to invite the fire department to conduct an in-depth inspection of the property for hazards to fire safety. This inspection was conducted in the presence of a general contractor, three members of the board of directors, two representatives of the management company, and three members of the Fire Safety Division.

The inspection took more than four hours, and it resulted in a comprehensive and very long list of absolute requirements before the community could be given a clean bill of health. We were very grateful for the time devoted by these already over-worked public servants. Their efforts were of great value on two fronts. First, they gave the community clear and indisputable evidence of extensive deferred maintenance. Second, by imposing specific requirements with time limits for performance, the requirements gave the management company unquestionable backing in the necessary expenditure of funds.

There followed an inspection of the mechanical systems of the community, supervised by representatives of the insurance carriers responsible for accident compensation for that equipment. A plan of action was set in motion to restore the equipment as practicable and to designate which equipment would be replaced in the near future.

The mechanical contractors were replaced with contractors who were able to maintain the equipment and to anticipate and avoid costly interruptions of service.

Inspections with the assistance of the insurance carrier engineers had an unexpected and most desirable consequence. It was discovered that extensive work had been conducted on the mechanical equipment back in April 1986 for which an insurance claim would have been justified. A claim was allowed on that occurrence notwithstanding the great passage of time, as well as for the recent occurrence. As a result, the community enjoyed a net recovery in insurance compensation in excess of $16,000.

The mechanics of correcting deferred maintenance, getting cleaning contractors in place, and in general undertaking to "shock" the appearance of the community to some semblance of order were no different than those used in any other troubled community.

The real trouble

It became apparent at the first regularly scheduled meeting of the board of directors that the primary source of the community's problems was the board of directors. There was no format or agenda for the board meetings. The only substance of the first and subsequent three or four meetings was recrimination against the former management company, criticism of the incumbent management company, refusal to attend to the affairs of the community, and constant bickering among members as to any order of business.

It very quickly became apparent to the managing agent that this community would self-destruct unless some method could be devised to attract the attention of the board of directors, attract the attention of the council of co-owners, or change the board of directors. Perhaps the correct solution might have been a fourth alternative; the managing agent could simply quit on the grounds that this is the kind of trouble nobody needs.

It always has been our contention that the managing agent is employed by the council of co-owners, not the board of directors. Certainly the board of directors acts for and on behalf of the council of co-owners, but in the final analysis, the entire community is the employer.

Faced with this situation, we decided to take a series of definitive actions. The first was to abandon any reference to a management report for activities of the prior month and to lay before the board of directors a precise outline of the problems facing the community. This would serve to disabuse the board of any thoughts they might have about negligence or incompetence on the part of the prior managers. It would lay responsibility for the confusion and disorder in the community squarely at the feet of the board.

This "lecture," as it was later referred to by some members of the community, was not well received. The managing agent did, however, remind the board that the prior management company had summarily resigned and that if it were the desire of the board for the new managing agent to do precisely the same thing, there would be no problem in making that arrangement.

At that meeting, which took place in January 1987, the managing agent informed the board of directors that all of the council of co-owners would be notified of the conditions of the property, the observed conduct of the board of directors, and finally of the willingness of our firm to undertake aggressively the problems of the community on a long-range basis if that were the council's wish.

That was a precarious time. When the managing agent left that meeting, he was aware that he had effectively quit and that he would remain only if there were a positive, visible move on the part of the council of co-owners to retain his services. Such action seemed all too unlikely.

Nevertheless, a two-page letter to all residents and owners of the community was prepared and mailed promptly. The letter discussed how our firm was approached and hired, the actions taken to date by the managing company, and the unwillingness of the incumbent board to seriously attend the affairs of the association.

The council of co-owners was invited by this letter to meet at a time and place of their choice and by their own arrangements determine whether they had justification to establish a viable, constructive board of directors. The co-owners were advised that our firm would remain in place for a period of 60 days to learn wherther the council of co-owners had taken decisive action and desired to retain our services. With that done, we then set about thinking about a replacement property for our management portfolio.

Out of the ashes

While all of these events were going on, the managing agent continued diligently to operate the property under the emergency authority granted four months prior. Within days of the mailing of the open letter, more than 20 absentee owners called our office to congratulate us on our actions, to encourage retention of management responsibilities, and to offer assurances that the council of co-owners would take definitive action. The organizational ability of those 20 owners was astounding.

Without a representative of our firm being present, a special meeting of the council of co-owners was held. Present, either in person or by proxy, were more than 75 percent of the council. The nine-member board of directors was summarily dismissed. In compliance with the bylaws, a new nine-member board of directors was elected, only two of whom were owners in residence. Paul Associates was unanimously invited to continue its efforts, this time with anticipation of absolutely normal exchanges between management and board of directors.

Thirteen months went by. Every single item of deferred maintenance had been corrected. Grounds were cleaned; mechanical systems were operating; contracts were in place for replacement of antiquated segments of those systems; the full board of directors was hard at work; the curb appeal of the property had improved to such measure that units are beginning to sell to persons who intend to occupy. Another thorough inspection of the property by fire safety officials showed only minor deficiencies. The management contract was renewed with a good increase in management fee.

The future

This community has a long, long way to go to achieve the degree of excellence to which its physical plant and its location entitle it. Residents have spent money. New air conditioning equipment cost approximately $50,000. People are beginning to act as building captains and to form committees that have specific tasks. Legal advice has been sought about resolutions that will benefit in the governance of the community. Plans are afoot that will lead to the revision and modernization of the bylaws.

The community suffered because of the ratio of absentee owners to owners in residence, the abuse of the property by absentee owners through careless selection of tenants, and most of all through the failure of the council of co-owners to monitor the board.

Without intelligent guidance, no community association can survive for long. There are some special self-managed communities that operate optimally through the efforts of a dedicated and permanent board of directors. For the average community association, however, continuity in operations can be provided only by a diligent and competent management company. With that entity in place, the board of directors may come and go as its members must. The management company assures long-term quality performance,

Conclusion

This turnaround, with its common and special problems, presents some important lessons for managers.

First is the need to know for whom the management company works. In any community association, the conclusion must be drawn that the employer is the council of co-owners, not the board of directors. It follows then that no management company of any merit can blindly follow the dictates of a board of directors without incurring serious liability.

The vast majority of people in our industry who manage community associations tell us emphatically that they work directly for the board of directors, and that therefore their employment is at the whim of the board of directors. This misconception clearly explains the frequent change in management companies by community associations.

There is a tendency in the management industry to accept responsibility for the management of community associations rather nonchalantly and to expect the management portfolio to change from time to time, gaining a property or two as one loses another.

With this trend is the practice of assigning as "property managers" persons with little or no experience to represent the company in the conduct of the affairs of a given community. When trouble arises, when there are differences of opinion, or when there appears to be a need for corrective action, a new property manager is assigned in the hopes that this palliative will be sufficient to keep the boat from rocking. In the long run, this concept of management is doomed to failure.

Unless the management company is willing to be involved aggressively in day-to-day affairs of its community and to provide objective and professional management guidance, the company is destined to wallow in a sea of change.

Great rewards are to be found in the field of property management. Apparently there are monetary rewards even for those who perform badly, but the ultimate reward is to be found in taking a troubled property and helping it to operate properly and to the benefit of its owners. This requires total involvement and willingness to fail.

John P. Hudson, CPM[R], is president of Paul Associates, Inc., Bethesda, Maryland. Mr. Hudson has over 10 years of property management experience. His professional and educational background involves in-depth skill and experience in successfully managing people and properties: negotiations, contracts, and landlord-tenant affairs. He holds an M.S. degree in international affairs and a B.A. degree in English and naval science.
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Author:Hudson, John P.
Publication:Journal of Property Management
Date:Jan 1, 1989
Words:3175
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