Finances

November 12, 2020 Published by Toronto and Area Chapter - By ALTIN NANI

Deciphering Condo Management Fees

From the Fall 2020 issue of the CCI Toronto Condovoice Magazine.

Discussing Profit Can be Contentious at Times, But Profit is Necessary to Keep These Services Available for Boards, and Their Buildings, to Use

Proposals are complicated. There is no other way around the topic. There is no single tried and true formula that is universally used in the industry to determine how much management companies will charge a condo corporation. Differing company philosophies and business considerations in the management industry result in price ranges so extreme that they would make even a pendulum blush.

With that said, it is too simplistic to reduce the validity and competitiveness of management proposals down to price alone. Picking the cheapest offer might save your building some funds, but at what cost? Managing a building comes at a set cost, and not all of it has to be financial; the portion of costs that are not covered by what you pay are eventually reflected in poor service and maintenance. Alas, low prices are usually too good to be true.

For condo boards, comparing proposals on price alone ignores the multitude of other factors that play a large role in the maintenance and performance of the property. How good will the hired manager be? What supporting staff will they have available to them? What is the firm's experience with similar buildings? These are all questions whose answers lie beyond the price spectrum. Therefore, management proposals should not be observed as "cheap versus expensive", but rather under the lens of whether or not the fee is correct.

What does it mean for a fee to be correct? The most correct fee is the one that most holistically and accurately represents the condo corporation's needs and offers appropriate services and action to fulfill those needs. Evaluating the correctness of a management proposal can be broken down into four categories: the salaries of site personnel, the cost of accounting staff, the cost of overhead, and the profit margin.

Salaries
The rapid development of new properties has increased the demand for property managers to unforeseen highs. In response, the salaries of property managers has increased (according to my estimates) to anywhere from 15% to over 50% in some cases. This is reflective of the already polarizing nature of management salaries, where job sites (e.g. Nuevoo, Indeed, etc.) list entry-level salaries at $37K, but with the potential to climb to over $100K with experience.

The other consequence of rapid development, especially with the abundance of new high-rise buildings, is the new requisite of having larger management teams; having assistant property managers, site administrators, and, has become the new norm. The average salary of an administrator is roughly $40K, not to mention that running these larger sites requires an experienced property manager that would need to be compensated appropriately.

Nevertheless, site administrators are becoming increasingly crucial figures to condo management; they are the ones primarily dealing with day-to-day operations as the manager deals with larger issues. Most administrators are also typically managers in training, looking to gain experience as they complete their management courses to obtain their certification. While they may enter the position with little applicable experience, they are promoted to managers at an accelerating rate.

Determining an appropriate salary for a manager and other site staff will never be an exact science, but relevant points include the manager's past industry experience, their educational background, time commitment to the property (in case there are other properties in their portfolio), and experience in other relevant fields. Another relevant factor is the staff 's personal needs (e.g. commute time/distance, working hours, etc.). The correctness of salaries should be evaluated in a qualitative analysis of these factors.

Cost of Accounting
Speaking from experience, the first reaction of many condo boards when confronted with the question of accounting is that they underestimate the load of work done by the accounting department. However, doing this undersells the importance of proper accounting support for a condo corporation.

Accounting departments are responsible for verifying and recording all financial transactions related to the condo corporation. They process every common element fee for each unit, every single invoice that comes in for maintenance, monthly contract payments for building services, and everything in between. This amounts to thousands of transactions per month for a single condo corporation, given to an accounting department that may handle upwards of a hundred corporations. Once these transactions are posted, property accountants must browse through the sea of transactions to ensure the financial statements are presented in a timely manner, and that they accurately depict the condo corporation's financial position. If they are not timely and/or accurate, poor financial information could lead to poor operational decisions costing the condo corporation hundreds, if not thousands, of dollars. The solvency and cash flow of a corporation may depend entirely on how efficiently and effectively the assigned accounting department completes their work.

This is without mentioning the roles of higher-level financial staff, including VPs of Finance and Financial Controllers, among others. They are responsible for implementing efficient processes, policies, controls and systems while also assessing the overall fiscal health of the condo corporation. This includes monitoring monthly and annual reports to ensure that expenses and revenue have gone to plan while also training the property manager how to interpret their financial statements. Their work is significant in the construction of accurate and informative financial reports.

Also worth mentioning is how accounting departments deal with the massive volume of transactions that come their way. The key to effective accounting in this environment is efficiency through standardization. The best accounting departments have a standardized system to process transactions regardless of the corporation they come from. This allows management companies to keep costs low, take on new contracts with little disruption to service, and transition staff from one set of transactions to another with minimal impact to efficiency. While there will always be a few transactions that require more work to process, a standardized accounting system is what any board should look for in a management company's accounting department, as that benefits everyone involved.

Ultimately, we are dealing with salaries yet again, and so good work will require good compensation. While many firms may offer cheaper rates, you have to ask at what cost? How much time will a management company's accounting department spend on taking care of your fiscal health? Are there efficient processes, controls and systems in place to safeguard the hundreds of thousands, if not millions of dollars in condo corporation assets? On an employee level, the difference in accountant quality at the $35K and $50K marks are significant. Good accounting is crucial to the financial health of a condo corporation, and must be paid as such.

Overhead
The overhead fee encapsulates all other expenses relating to the management of a condo corporation that may not necessarily be as directly visible as site work. These include support from a head office, software expenses, insurance, and other business expenses. Having good management and accounting staff is great, but they must have the proper workplace support, both personnel and equipment-wise, if they are to truly offer quality management services.

Contributing to effective overhead support is the education of property management employees. After the updates to Ontario's condo laws in 2015, obtaining management certification has become a practical necessity for individuals seeking successful careers in property management. A good company will invest in these individuals by helping fund their required education to obtain certification, thereby mutually benefiting both employee and employer.

Another consideration the changes to condo laws brought forth was the relevance of various certificates. These are requested at high volumes, and management firms must make the decision of whether they are produced on-site or at a head office. Choosing the latter means that site teams often have more time to solve building-related issues rather than spend copious amounts of time on administrative work. A higher overhead expense results in more administrative support from a firm's head office, which produces more activity from an on-site management team. Firms that produce certificates (and other administrative materials) on-site may not have the same amount of time to allocate to sustain site-focused activity.

I spoke earlier in the accounting section about how effective management firms are able to standardize most of their work to minimize disruptions in service; the key word is most. Inevitably, there are always situations that need to be dealt with outside of the standardized process, and a good firm will recognize the importance of dealing with these anomalies. It is often with well-funded overhead support that these anomalies are addressed effectively. Higher overhead fees suggests that more specialized help would be available than at a firm with lower overhead fees offering more generalized employees.

Support for site offices can also come in the form of software. From accounting, to building management, to human resources, software is being used more than ever in the condominium industry. Residents should already be familiar with online management portals; processing maintenance requests and amenities bookings through digital means allows site staff to focus their energy on more demanding tasks, thereby improving the efficiency of a condo corporation's management team while also cutting costs on manpower. Most importantly, good software allows the building to be managed around the clock by enabling more effective communication, making up for unavailability of present staff during off-hours, or as COVID-19 has demonstrated, in times of crisis. Access to and comfort with these technologies may result in a slightly higher overhead cost, but they will result in exponentially better service.

Other relevant overhead costs include rent, company insurance, legal support, office supplies, remittances, and other general business expenses. The sum of these costs depends largely on the size of the firm offering management services; there is a big difference in the finances needed to support an office of two people, and an office of fifty. However, bear in mind that larger companies also have the capacity to scale their expenses better through standardization, which could help cut costs, and therefore management fees; a higher up-front overhead cost carries the potential for greater savings over the course of the agreement. The question should not necessarily be what the correct price is, but rather if the price being offered adequately covers the needs of a given condo corporation.

Profit
All businesses need to make a profit. This is an indisputable fact. While it can be tempting as a client to disregard the importance of your provider earning their share, the reality is that without profit, the services needed would not be available. The same applies to property management; discussing profit can be contentious at times, but profit is necessary to keep these services available for boards, and their buildings, to use. The best way to approach the discussion of profit is to understand industryspecific standards and risks.

Firms involved in real estate property management have a wide variety of profit margins, mostly due to the varied nature of properties and how they are managed. The National Association of Residential Property Managers (NARPM) lists the average profit margin of these companies at 20%, which encompasses commercial, office, retail, and residential properties. However, condo management is the black sheep of the bunch, and must also be discussed since it is a significant portion of where property management in Ontario occurs. The close proximity of these units, as well as their overlapping needs, make condominiums much more cost effective to manage. I have seen margins go as low as 2-3%, or as high as 10%. Again, the needs of different buildings vary.

On average, a reasonable expectation for profit margins in condo management should be 10%. The price should reflect a solid middle-ground between the risks and rewards of providing property management services. Property management firms are constantly dealing with legal claims from residents, and while most amount to very little, it still culminates in a massive amount of liability for the firm involved. The profit made from operating at a property must outweigh the potential, even if minor, risk of residents pursuing legal action.

Profit is what keeps services available, and as such improves service at your building. Healthy profit margins translate to better investments that make the firm better, and can also act as a cushion for unforeseen business expenses. The discussion of profit should not be centered around what either side wants, but it should be a collective riskreward analysis.

Concluding Thoughts
The management industry is complex, and so it is only natural that discussions of pricing within the industry are equally as complex. Buildings themselves vary greatly, with no two buildings requiring the same type of service. The best approach to understanding management fees is to first understand the desires and needs of your building and its residents. Only then will it become apparent what kind of management services you are looking for. Fit is everything, and above all, you get what you pay for.