Kellie Falk-Tillett, managing partner for Drucker & Falk, a third party manager based in Norfolk, Va., knows the signs when one of her apartment owner clients is trouble. They start asking her to cut fees, end bonuses, or slash overhead. But desperate times call for desperate measures. And some of the things she’s had clients ask for recently have even gone a step beyond this.
“We’ve had people cut back on office supplies, even though the budget was set for the year,” she says. “They’ve made us stop turning units. They’ve even told us they still want ballons out in front. But instead of each property buying ballons, they wanted us to buy in bulk for all of the properties and distribute the ballons.”
She’s had clients decide to offer a la carte rental packages, such as charging an extra fee for a faucet, accent wall, or another touch. When this didn’t take with residents, the client took more drastic steps. “They didn’t believe us,” Falk-Tillett says. “The prospect had to sign off on the list to the prospect that they didn’t want it. Then the sign-off sheets were audited to make sure we were telling the truth.”
Some of what Falk-Tillett is facing may sound downright petty, but in this time—where struggling owners are trying to keep afloat properties that they paid a premium for in the boom years—it’s become the norm over the past year. That means they’re squeezing their property managers even harder and making requests that may seem unreasonable.
“The economic aspects are difficult,” says Rick Graf, president for Seattle-based Pinnacle, an American Management Services Co. and one of the country’s largest third-party managers. “It causes stress on the operators, who make money on the income. The reality is we have 15 percent to 30 percent less income, depending on the market and the property, but the expenses of running the property are the same.”
While Graf thinks some owners have moderated their demands over the past year, there are still potential problems. For one, property managers have to be on the defensive, pointing out to owners why cost-cutting initiatives may not always be the best move.
“It forces us to deal with a different level of expense control,” Graf says. “They may want one or two less people. If we do that, we tell them the byproduct will be this or that. We don’t want to cut so far that the property will trend downward.”
Ultimately, a property owner has to stand their ground to save their bottom line, sanity, and even their reputation. For instance, property owners provide their managers with funds to pay vendors. Without these funds, vendors go unpaid. Even though the manager isn’t the one withholding payment, the vendors still often hold them responsible. This can spell trouble for a manager with a large national footprint, like Pinnacle, or a large footprint in particular markets, such as Memphis-based Fogelman Management Group.
“Without a doubt, during the downturn, we did have several properties that were experiencing cash flow problems,” says Mark Fogelman, president and chief operating officer of Fogelman. “It meant there was less money to pay bills. It did take a lot more effort to work with vendors and prioritize and try to explain to owners why they needed to spend cash. Some of our experiences were successful and some weren’t. We’d like to avoid those situations because it could damage the management company’s reputation.”
Indeed, Fogelman will say no to a potential client if he doesn’t like the situation. And ultimately, a management company needs to be able to cut the cord with troublesome clients as well. Drucker & Falk is phasing out of a relationship with the company that wanted bulk orders of balloons, and Pinnacle has done this as well.
“We’ve gotten to the point with some clients that we can’t service them,” Graf says.