When developer Geneva Holdings contacted Mark-Taylor Residential about design services for a new 342-unit apartment project in north Scottsdale, Ariz., Mark-Taylor president Dale Phillips saw an opportunity for more than just a few thousand dollars in consulting fees. Pushing his firm's fee-based management business, Phillips believed that if Geneva wanted to launch an apartment property in his core market, Mark-Taylor should manage it.
"Through the use of our consulting services, we had the perfect introduction to expand our management business," Phillips says. "It was working perfectly. It seemed like a natural fit."
Little did Phillips know how harrowing it would be to actually land the final deal. Of course, third-party property management companies need to be on their toes for opportunities like this. But they also need to protect themselves from evolving scenarios that can take hold after a deal is inked. Mark-Taylor, for example, nearly ended up losing the deal altogether, even after Geneva hired it for both consulting and management services.
Just six months after Mark-Taylor started working for Phoenix-based Geneva, the deal abruptly got put on hold. With the property still under construction, buyers started courting Geneva, seeing a rich opportunity to get in at a prime-location property ripe for condominium conversion. "These were unsolicited offers," says Randall Paul, the Geneva principal who was spearheading the deal with Mark-Taylor. "People were coming to us out of the blue, saying they were interested."
By that time, Mark-Taylor had already put considerable effort into the project, building a Web site for the community, rolling out roadside banners, and marketing it within its network of communities. When one potential buyer got serious with Geneva, those efforts suddenly seemed for naught. "The [potential buyer] mandated that we stop all leasing efforts," Phillips says of the negotiations. "They said they preferred brand-new, unoccupied units, so we got sidelined."
Ironically, though, the potential buyer's stance gave the project's financiers pause, as construction continued without any units being pre-leased or sold. Accordingly, those concerns put the conversion deal on the back burner, and Mark-Taylor found itself in the driver's seat once more. Now, with the property completed, Geneva has officially named Mark-Taylor to manage the Shade Apartments at Desert Ridge, Scottsdale's tony residential and shopping area. Pre-leasing began in March, and residents started occupying units in April 2006. But condo converters are still courting Geneva, and both firms are keenly aware that circumstances could change again. "It's been a roller coaster ride," Phillips says.
The story of the Shade Apartments at Desert Ridge, and Mark-Taylor's ability to finally land the management deal from Geneva, illustrates the increasingly dynamic environment of third-party property management today, as projects change hands in an ever-shortening time frame. Indeed, the number of apartment deals more than doubled in the last two years, jumping from 1,620 in 2003 to 3,610 in 2005, according to Real Capital Analytics, a New York City-based research firm. Meanwhile, condo conversion sales mushroomed to 819 last year, compared with just 326 in 2004, according to the firm.
Given that trend, fee-based managers are facing new challenges to stay employed at a given property for an extended amount of time, before a new owner comes in and puts its own team in place or simply bids out the project anew. Still, experienced multifamily operators say there are steps firms can take to ensure tenure in the leasing office lasts–and to protect themselves if it doesn't. There are also opportunities to exploit in this environment, but those same executives caution that with the dizzying lineup of new owners getting into the business, it's critical to find out how a potential client operates–and what its objectives are up front–before inking a deal.
Key is accepting the market for what it is. Owners that rapidly acquire and sell properties are simply carrying out their fiduciary duties by capitalizing on opportunities in the market. "There are times when a client sells a property and it goes to somebody else. That's just the nature of the beast," says Kellie Falk-Tillett, co-CEO of Raleigh, N.C.-based Drucker & Falk, which manages more than 30,000 units in the Southeast and Mid-Atlantic regions.
Managers do need to protect themselves, though, because there's no static state in property management today. "An owner should be able to do whatever they want with an asset," says Julie Smith, president of Bozzuto Management Co. in Greenbelt, Md., who has observed a pronounced increase in transaction activity in the last six months. "But a manager needs to make sure there's already an agreement in place to make them whole, if an owner sells within the first year." That's why Bozzuto has started to write early-termination fees into its deals. "We're doing that with a lot of our new contracts today, to compensate us in the event there's a change of plans," Smith says.
Phillips says Mark-Taylor is inserting similar provisions into its contracts, and the company could have fallen back on the clause had a condo deal precluded it from managing the Shade at Desert Ridge. Fortunately, owners usually understand the need for that kind of safety net. "I think it's only reasonable for a property manager to ask for some kind of breakup fee in the first year," says Paul, the principal at Geneva. Neil Rosen, president of Virginia Beach, Va.-based NJR Real Estate Consulting Services, which advises owners on management services, says he'll usually accept such language in an agreement. "Those kinds of clauses are only fair," Rosen says.
In addition to the obvious financial benefits of setting terms outright, there's another advantage to using early-termination fees: An owner's reaction to the subject can be telling in determining what its true objectives are. "If they know in their minds they're flipping the deal and they're bluffing you, that person will be somewhat hesitant about a one-year guarantee," Phillips says. In fact, for Smith, hesitation could be a deal breaker. "If an owner doesn't want to agree to something like that, we would decide if we wanted to be considered for the assignment," Smith says. "That's the time to make that decision."
Making that decision quickly, early in a dialogue, is an aspect of landing the deal that executives stress time and again. How long a management relationship lasts and how profitable it is for both parties come down to the initial terms and expectations each side brings to the table. The sooner both participants get frank, the more open and mutually beneficial a relationship can be, as opposed to one that feels like it's leaving on the next train out of town. "It all comes down to how early we're all going to get honest with each other," Phillips says. For Smith, the initial meeting with a client, whether in person or on the phone, is crucial. "The best communication takes place right at the beginning of the conversation," she says.
Put It in Writing
That's particularly true when it comes to responding to requests for proposals, a process that's increasingly burdensome as deal flow increases. Managers can avoid a lot of headaches by finding out what's important up front. "I'll call and ask, 'Is this really just going to come down to a fee, and if so, what's your threshold?'" Smith says. "If it's below what we would accept, we would probably withdraw right then."
Given the frequency of deals today, managers need to be prepared with a standardized response that can be customized to a particular situation, says Karen Tepera, vice president of business development at Irving, Texas-based JPI Management Services. "You've got to always be ready," Tepera says. "Then, you can research the deal-specific information." At Drucker & Falk, Falk-Tillett says her company has drafted a template "so we don't have to keep reinventing the wheel. We may get a call on a Friday and have to be ready to go on Monday," she says. "It just comes with the territory."
Tepera cautions that managers need to be particularly cognizant of competing on price in those proposals, though, especially as more owners look to increase net operating income over the short term. "It is very easy to fall into a price trap," Tepera says. "But at some point, low pricing drives diminished returns."
Just as with a termination fee, how an owner reacts to price can indicate what type of client they'll be. Indeed, Rosen, the owner-consultant, says he often questions firms that lowball a bid. "It's the old adage that you get what you pay for," Rosen says. "If somebody's willing to undercut somebody else and give you a 3.5 percent management fee, you have to ask yourself: Is that because he's only going to give you 3.5 percent worth of management effort?"
Other crucial issues to hammer out early include what type of business management software a potential client uses (and who will pay if new software is needed), how routine expenses are covered, and even the level of employee a client expects to work on site. At Dallas-based BH Management, which manages more than 30,000 units, CEO Laurie Lyons says the firm has worked out a detailed list of items that need to be agreed to early and put it in a section of her firm's contract referred to as Schedule F.
"It outlines everything from who pays for the pencils at the property to who picks up the tab when somebody travels," Lyons says. "It's all factored in."
Executives also recommend speaking to vendors and other managers to get a feel for how a potential client operates. Falk-Tillett contacts vendors to ask if they're getting paid and will "mystery shop" a property to find any hidden issues. "I send in one of my best on-site managers, who's married to one of my best maintenance men," Falk-Tillett says. "I get separate reports from each of them, one looking at deferred maintenance and the other at how they're doing with curb appeal, marketing, and sales."
Bigger, Better Business
Of course, the fact that properties are changing hands rapidly doesn't have to hurt fee-based management business. It has a flip side: More properties are coming up for management, too. Indeed, many fee-based managers are finding ways to plumb the phenomenon for new opportunities. Take Mark-Taylor's Phillips, who says today's swift transaction pace has actually changed his company, while presenting new opportunities. That was the case for the management contract at the Shade at Desert Ridge, which grew out of the firm's design consulting services. Phillips says other new offerings at Mark-Taylor are producing similar results.
"We've had to remain extremely flexible and willing to go where this wild market has taken us," Phillips says, pointing to the design, realty, and condo conversion services his firm now offers. "It's just not as simple any more as sitting down at a table and saying, 'Hey, we'd like to manage your property.' You have to nurture the relationship with a variety of company resources."
At Jacksonville, Fla.-based WRH Realty, which manages 14,000 units across the Southeast, senior vice president Cynthia Lucas says there's an easy way to get introduced into deal flow early on: Talk to the people who facilitate it. "The brokers and the lenders are your friends," Lucas says. "The best strategy we've found is to network with those players, because they can introduce you to the new owners coming to town."
In the ever-changing environment of today's fee management world, the bottom line comes down to knowing the people and companies with whom one is doing business and finding the best opportunities in that climate. By probing potential clients' intent early and asking for assurances, third-party managers can protect themselves and be privy to the best deals. Seeing the trend as a sign of new opportunity, and not as a threat to existing business, may be the most important factor of all.
"There's a tremendous amount of opportunity right now," BH's Lyons says. "What it adds up to is a lot more availability for people like us to go out and obtain new third-party management contracts."
–Joe Bousquin is a freelance writer in Newcastle, Calif.
Experts share tips for sealing the deal today.
1. Get candid early. Finding out a client's true intent at the beginning saves a lot of work down the road.
2. Include early "break-up" penalties, equal to a year's management fees, in contractual agreements.
3. Gauge owners' reactions to early-termination fees and pricing to gain insight into their objectives and what kind of relationship they want.
4. Be ready to go fast, with a standard response to RFPs that can be customized to fit a specific deal.
5. "Shop" new properties and talk to vendors to find out how an owner treats clients and residents.
6. Offer additional services, such as design and real estate consultation, to position your company for new opportunities.
7. Network with brokers and lenders, who can introduce you to the new owners who may be coming to town.
8. See the dynamic environment as an opportunity to land more deals, not a way to lose clients you already have.