IN 2006, WHEN APARTMENT BUYERS and condo converters were trading multifamily communities in an all-out blitz, Scottsdale, Ariz.–based property management start-up Mark-Taylor Residential got word that a seven-property portfolio for which it held the management contracts was hitting the block.“It was a challenging moment for Mark-Taylor,” recalls company president Dale Phillips. “Those seven communities were approximately 45 percent of our business at the time, and we had to make some quick and important decisions on how to handle things during the sales process while planning for the future."
Given the hot transaction market replete with a variety of private, public, and institutional investors, Phillips and his team knew that the continuity of their management contracts was hardly guaranteed. At the same time, the Mark-Taylor crew saw an unbelievable opportunity to exponentially grow their business regardless of whether or not they retained management of the portfolio.
“We quickly realized that the due diligence process was about to bring as many as 50 prospective buyers out to tour and underwrite our properties,” Phillips says. “We wanted to showcase our management expertise at every turn to what we knew would be a wide range of operators."
Landscapes were manicured, occupancy was supercharged, and property staff even donned professional name tags, but as it turned out, Mark-Taylor ultimately lost the management contracts.
To make matters worse, the new owner made a run at Mark-Taylor on-site personnel, a poaching tactic quite common to new fee-management takeovers (see “Poaching Personnel,” page 30). Still, the ulterior strategy of selling Mark-Taylor to prospective buyers paid off: In the more than four years since the portfolio transaction, Mark-Taylor has tripled its units under management, with a lot of the new business coming from clients (and referrals from those clients) that were met during the 2006 deal. “That process is still paying off in new business,” Phillips says.
Mark-Taylor's experience will likely be a common one this year. With 2011 expected to usher in a healthy increase to apartment deal flow, management firms are anticipating both risk and opportunity as communities change hands and new owners decide how to best run on-site operations.
Let's Make a Deal
Whether holding on to management contracts at existing properties, working client relationships to be the first call after an acquisition, or using the due diligence process as an intro to new prospects, property managers can leverage opportunities out of the disposition process.
“The first thing you do is assist your current client through the due diligence process and help them prepare for the sale by pulling together all of the information that the broker is going to need,” says Cindy Clare, president of McLean, Va.–based Kettler Management.
A typical deal prospectus is going to include trailing 12-month rent fundamentals and information on capital improvements and/or deferred maintenance. The good news: Unless you are managing a down-and-out property (and you know who you are), prospective buyers typically will be somewhat enamored of your community's performance from the outset.
“When an investor is buying a building, they are often happy with the way it is being managed, and helping your existing client through due diligence is your first opportunity to show the new buyer what a good job you have done as a manager,” Clare says.
While apartment dispositions and due diligence processes offer an opportune time for fee managers to put their best foot forward, Phillips and Clare both stress that it's equally important for management firms to carefully consider any new contracts that come their way.
Although Mark-Taylor doesn't handicap which prospective owners to court over others, Phillips nevertheless says it's important not to pursue contract retention at the expense of an ill-fitting business relationship. “Everyone wants the best management on their property, but the definitions of ”˜best management' vary widely from client to client, depending on their needs, their business model, and their experience with other managers,” Phillips says.
“If you ask a prospective client what it is that they like about their current fee managers— and what they don't like—it'll give you a clear idea of whether or not your team can make a competitive difference."
On the flip side of the acquisition proposition, property managers can often gain new units from existing clients. “Deal flow is always an opportunity to grow the business; the key is building relationships with your clients so that they look to you to award management when they make purchases,” Clare says.
Establishing and maintaining consistent takeover skill sets can assist greatly in that regard. The property manager's ability to get back-of-house bookkeeping and accounting affairs in order; audit telecom, utility, landscaping, and waste service contracts for continuation or termination; and, of course, embrace and alleviate the concerns of curious residents is vital to easing the transition for both management and ownership.
“We call our system ”˜Make It Mark- Taylor,'” Phillips says. “Even before we take on management, we are identifying the people and systems that need to be in place or replaced as we are preparing for the change.
We believe that as soon as you've signed a contract, you are obligated to manage that property up to the standards of your brand promise. We call up every new owner when all systems are a go, and I'll typically look to have that call made by noon on the first day we are on the property."
If any of your clients have distressed real estate opportunities on the 2011 radar, prepare for an even tougher takeover. Loan and CMBS maturities that are in default and in the special servicing process or have gone to a note sale or foreclosure are likely to have serious on-site issues requiring immediate short-term and dedicated long-term attention. Greenwood Village, Colo.–based Laramar Group, which is working on receivership deals with the special servicing units of Key Bank, Midland, NAI, and Principal Insurance Group, among others, has experienced more than a few owners on the outs taking vengeance on the property.
“They might start pocketing rent or security deposits—we even had an instance where the owner was taking the appliances out of the units and selling them on the side,” says Laramar CEO Dave Woodward. “Even if they are good guys who got themselves into a bad deal, clearly the focus on the management side goes away for the most part, and, unfortunately, multifamily fundamentals can deteriorate quickly."
With distressed real estate, Laramar stresses safety first. “When you come on board, you've got deferred maintenance, vacancy, and staff and resident satisfaction issues,” Woodward says.
“The absolute No. 1 priority is life safety: Make sure lights and alarms are working and smoke detectors and fire extinguishers are all in place.
Then you can start addressing resident issues and potential capital expenditures."
Lastly, reaching out to residents will always make an impact on community morale. The “Under New Management” banner may seem clichÃ©, but letting tenants know that positive change has occurred is critical to smoothing new management transitions.
“The day of the takeover, issue a letter introducing the company and the new property manager and list where to send your rent check and numbers to call for service requests and for the leasing office,” Clare says. “Within the first 30 days, you need to be more present than ever in the leasing office and on site. Be visible and, quite often, residents will take the initiative and come to you first. If not, host an event and serve food. You'd be surprised how quickly you get to know your new neighbors."
Apartment transactions can trigger a change in management—and often a run at recruiting existing on-site personnel.
SPIRITS WERE HIGH WHEN Scottsdale, Ariz.–based Mark-Taylor Residential got word that it'd likely keep the contract on a seven-property portfolio one of its clients put up for sale in 2006. “We had put our best managers on all of those properties to really showcase the talent of Mark-Taylor to prospective buyers,” recalls company president Dale Phillips. Just days before taking over the property, the new owner reneged on that pledge and then made a move to hire Mark-Taylor's personnel right out from under them. Fortunately, the start-up boutique property management firm had a lot of growth opportunities to counter with. (The firm has since tripled in size and in December 2010 was named one of Arizona's Best Places to Work by the Phoenix Business Journal.) In total, Mark-Taylor retained 58 of 65 employees associated with the portfolio.
The recruitment of on-site personnel during a management transition is, in fact, quite common, if not always conducted as nefariously as Mark-Taylor's unnamed, would-be client did it. “One of the first things we do when assuming management of a new property is to ask the previous management company if they have positions already identified for existing staff, and, if not, if they will grant us permission to speak with them about staying on,” says Cindy Clare, president of McLean, Va.– based Kettler Management. “You do want to be sensitive about the current site management, but you also want to hit the ground running."
When not staged on the sly, recruitment of existing on-site staff (especially top performers who are powering the rent fundamentals that made the acquisition attractive in the first place) can be an effective means of easing the transition between management companies. After all, for customer service–minded residents, the best new property manager is often the one they've always had.