Penmark Property Advisors, LLC

NEWS NY

Times For Managing Agents, It's a New World By TRACIE ROZHON Published: December 17, 1995 Correction Appended

AFTER a series of kickback indictments stained an otherwise colorless industry, many managing agents -- the men and women who handle millions of dollars of expenditures and hiring for the city's co-ops and condos -- have spent much of the last year reforming, consolidating and reorganizing their businesses.

With the 49 indictments leveled 18 months ago as the catalyst, some managing agents have hired private investigators and public relations people to clean up their images and their procedures; some have formed their own association, which promptly passed a code of ethics; some have merged or sold or dissolved their companies; some have introduced multiple bidding systems. Some have spent heavily on computerized central purchasing and billing systems -- reforms they say are not only more corruption-proof, but save their co-op clients money as well.

These actions, many say, also give them an edge in what they call a "dog-eat-dog" industry, where they say they are often underpaid and seldom appreciated, a business in which there is always some hungry young company willing to undercut their fees.

The kickback investigation -- which the assistant district attorney supervising the case said last week was continuing in both the residential and commercial property management segments -- dramatized what the managing agents say they had known all along about the industry: that it was a dinosaur that desperately needed to become more high-tech; that it could no longer be treated as a secondary arm of a real estate company -- as one agent put it, a "loss leader" for the more lucrative sales and rental division.

Property management is "an industry that is in the process of defining itself," said Leslie Bogen Winkler, president of the Association of Cooperative and Condominium Managers, which had its first general meeting in June. Kent M. Swig, co-chairman at Brown, Harris, Stevens -- an old-line firm that changed hands in March after having been badly tainted by the corruption scandal -- called the industry "chronically underfunded" and said it was currently undergoing a "global change."

Donald Goodwin, a Brown, Harris managing agent, ticked off the changes in the old-line firms or their management units: "We've been bought; Douglas Elliman has been bought; William B. May Management has been bought; Sulzberger-Rolfe is gone. Of the smaller firms, Bellmarc and Regal merged at the end of last year. Almost half the major firms have either merged or disappeared, and the pace is accelerating." Such changes, Mr. Swig prophesied, will include still more consolidation of the major players, fewer and fewer midsized firms and a constantly shifting group of "one- and two-man shops."

Oskar Brecher, head of American Landmark Management, which oversees 8,500 units, called Mr. Swig's predictions "the common wisdom" in the industry. "There will be further polarization -- only very large full-service companies and very, very small hands-on owner/managers with maybe 10 or 15 buildings will be left," he said.

Mr. Brecher, who termed his own company "mid- to large-sized," is looking for a company or companies to join with -- either wholly or as a back-office-only collaboration. He said talks with Charles. H. Greenthal Management, which oversees 15,700 units, recently fell through. "The way the fee structures are set up, it is difficult to have a decent bottom line," he said, adding that the pressure is particularly intense for midsized firms, with more salaries and more office expenses than the small firms. "If we aggregate ourselves into larger entities, we feel we can be more efficient," he said. "It's a personal-relationship-driven business. Boards are demanding access to senior management -- they don't want to feel like small cogs -- but they want to keep fees tight to the line. It's a difficult act to balance." The changes that have already occurred were at least partly caused by the increasing sophistication of co-op boards, which have started demanding a lot more bidding and budget information and a lot more financial advice from their managing agents -- often without increasing their fees. "The industry is becoming much more pro-active," said Jay Seiden, a lawyer who spoke at the managing agents' association's first educational seminar, held two weeks ago. But at the same time, Mr. Seiden warned, agents must become "more careful in your dealing with contractors because you're at great risk." IN the wake of the indictments, many managing agents have instituted reforms. They range from hiring private investigators to vet their own procedures in bidding jobs and hiring subcontractors, to forcing contractors to submit to lengthy background checks. Brown, Harris, Stevens -- with 17 of its agents indicted -- had, as part of its civil settlement, agreed to hire its own independent inspector general "to insure that its employees do not engage in improper conduct in the future." The company hired Kroll Associates to look at the scope of the way it did management business and to monitor its procedures. "For years we always assumed people were honest," said Mr. Goodwin, a New York City managing agent for 36 years who has been with Brown, Harris for 8 years. "Now we are taking a more aggressive stance. We monitor procedures, policies and people. We don't take anything for granted." Last week, Daniel J. Castleman, the assistant district attorney supervising the kickback case, said that in addition to the 48 indictments against individuals and one against a corporation -- the now-defunct Darwood Management -- his office has obtained an additional 34 sealed guilty pleas by individuals and three by corporations as part of the initial investigation.

Subsequently, a number of additional individuals have pleaded guilty and have had their pleas sealed. One official with knowledge of the investigation said that the exact number who had pleaded guilty in the continuing investigation was not being released because "obviously these are people who are cooperating and we'd prefer not to let the public know exactly how many they are." So far, there have been no trials -- 94 percent of those charged have pleaded guilty. One managing agent has pleaded not guilty, but no trial date has been scheduled. Five cases were dismissed because those involved, either as defendants or witnesses, were either dying or left severely impaired by illness. Only one man is serving prison time; he is spending 20 weekends in jail. The district attorney's office has not pushed for prison terms, Mr. Castleman said, "because our goal was to change the way the management business was conducted."

"With white-collar crime, we want to see the kickbacks paid back," he said. "We feel that's a powerful enough deterrent." He added that with "the critical shortage of jail space, we feel it's wise to reserve the scarce jail cells for violent criminals." Thus far the District Attorney's office has received $4 million for a restitution fund to reimburse victims. The District Attorney has not yet come up with a recommendation -- which would have to be approved by a court -- on how to dole out the money.

"It's not easy," Mr. Castleman said. "We've come up with plans for securities industry infringements, but in those cases it's clear who's the victim and how much they lost. In these cases, a managing agent might have taken money from a contractor who serviced 60 buildings in varying degrees. How do you assess that?"

ACCORDING to the owners of management companies, real estate lawyers and other real estate professionals, the indictments only accelerated the consolidation of the industry -- in the most recent cases, two big firms were bought by a national management firm and one was bought by a partnership that includes one of the city's biggest developers.

"You have to step back to 1976, when this all started," said Neil J. Kreisel, who until a few months ago owned the Kreisel Company. In September, that management firm -- along with the management arm of Douglas Elliman -- was bought by the Insignia Financial Group, a national concern based in Greenville, S.C.

"In 1976, changes in the co-op conversion law made it easier to convert and there was a proliferation of co-ops," said Mr. Kreisel, who remains president of Kreisel. "In a profession which until then many defined as rent collectors, this was a major change in the business. Sales of apartments or insurance came before management. In the mid-80's, developers began to manage their own buildings: Rose Associates, Marty Raynes, even Donald Trump. Everyone was a manager, and some were better than others."

According to Mr. Kreisel, the management services did not keep up with the expansion and "the infrastructure was never improved to meet the needs." The managing agent scandal, many agents say, merely hastened the necessary reforms

"In the old days, nobody paid that much attention to the management part of the business; it didn't count as much," said Ruth Lerner, managing director of a company that manages over 3,000 units in two large residential complexes, Waterside Plaza and Manhattan Plaza, and who owned her own small company before she became, as she says, "burnt out" with all the hard work now required.

"It used to be that if they didn't get the financial package done, it would just be late -- if they bothered to prepare it at all," she said. "Boards didn't used to push and in those days, the physical plants often got neglected; today, the boards are examining everything much more closely. The new firms know they have to meet certain goals, and the old-line firms are beefing up and becoming more proficient."

After the indictments, co-op boards -- already stung by a recession that left many of them scared of defaulting shareholders, unsold units and drawn-down reserve funds -- became more demanding. Especially after the indictments spotlighted the diligence necessary to oversee a co-op corporation and its building, the boards started asking for "more sophisticated purchasing analyses, and sophisticated use of funds, including types of mortgage refinancing," Mr. Kreisel said.

The indictments speeded up a pattern of mergers and acquisitions: The Helmsley organization , faced with a $1 million payment to the New York District Attorney's restitution fund for wrongdoing by some managing agents at Brown, Harris, Stevens, a company they owned, paid the money and sold the company to a partnership consisting of William and Arthur Zeckendorf, Mr. Swig and David Burris -- two pairs with 50-50 control -- and to Allied Partners, a passive real estate investment company. The price was a reported $3 million. The new owners have instituted a series of major changes, which included a move to the Upper East Side two weeks ago and the hiring of Kroll Associates.

Michael Cherkasky, who runs the New York office for Kroll, stressed that each managing agency has reacted differently to the indictments. "It's not monolithic," he said. "Some elements of the industry now understand that certain management efficiencies instituted to lessen corruption are actually good business."

Mr. Cherkasky said that firms like Brown, Harris, Stevens now have strict prequalification standards for suppliers that include background checks. "If a company has been sued 30 times because their work is not up to standard, or if a company has been debarred by the city, any good management company would want to know that," he said.

In addition to enforcing codes of ethics for both the management agents and the suppliers, Kroll also recommends periodic audits of the managing agents' purchasing and billing systems and across-the-board monitoring of all procedures.

At one time, 80 percent of the old-line companies' business was sales or rentals, Mr. Goodwin said. Getting the management contract was a quick ticket to getting the inside track on sales within that building. "It was like they'd do it for free -- or practically free -- just to get the other business," he said. But with the increasing sophistication of co-op shareholders, who often wanted to list their apartment with a number of real estate brokers, or even sell it themselves, the property management divisions were forced to become more efficient -- or die.

"It's now a stand-alone business," the managing agent continued. "In our case, we still sell real estate, but the management arm must stand on its own merits; it must make its own profits and losses"

William Zeckendorf, one of the company's new owners, said Brown, Harris will prosper because it charged fees that were fair and adequate, considering the services it offered. "A lot of these small companies start out by trying to undercut the bigger companies," he said. "But they might be a one-man shop, operating in an apartment."

INDEED, the question of fees for managing agents is a perpetual subject of discussion -- and most agents contend they are paid far too little. Many say they simply cannot survive on the "bare bones" fees paid them, fees that are usually based on a yearly price per apartment unit. Although owners of management companies refuse to make public their fees, the consensus is that the companies charge an average per unit cost that ranges from $350 per year in the largest buildings to between $550 and $700 per unit in the smaller buildings. Yet that is only an average; yearly management fees for a co-op building can run from $15,000 all the way up to $150,000. Yet universally, managing agents say the fees are not high enough for the amount of work accomplished.

"We got out of the management business because we weren't making any money," said Peter Marra, president of William B. May Real Estate. "It just isn't a profitable business to be in -- at least not for us."

Three years ago, May sold off its management arm. "We tried doing to do it small and we tried to do it big," Mr. Marra continued, "and we couldn't make money either way." "It's a thankless business with endless problems," he said, repeating the comments of many. "Somebody must be making money -- there's still people doing it -- but we're glad to be out of it."

To compete today, managing agents -- even the smaller operations -- say they must have state-of-the-art computer systems and what Mr. Kreisel called a "non-revenue-producing support staff."

"You need a central purchasing department -- that doesn't directly generate revenue," he said. "Fifteen years ago, I can't imagine the owner of a management company spending money on a purchasing agents and sophisticated computer systems." BUT now they are. Mr. Zeckendorf said he has already invested $750,000 on upgrading the company's office space, computer and purchasing systems and telephones, and plans to spend $250,000 more.

Mr. Kreisel said the main reason he sold is to take advantage of Insignia's "bells and whistles," including state-of-the-art computers and optical scanning systems that allow 24-hour access by board members to receipts and purchasing information.

For his part, Mr. Zeckendorf quoted before and after figures to demonstrate how company-wide purchasing -- not building-by-building purchasing, as was often done in the past -- saves buildings money. And with more buildings signing up, it makes the management business make money, too, he said.

By buying in bulk for Brown, Harris's 120 buildings, the individual buildings would pay $260 for a doorman's uniform compared to $300 to $350 if bought separately, he said. They would pay 30 to 32 cents for a 40 watt light bulb, compared to 48 to 94 cents. They would pay a flat $2 fee to have their fire extinguishers inspected, compared to paying between $10 and $20.

Although these suppliers are chosen through a bidding process, Mr. Zeckendorf stressed that the low bidder is not always chosen; quality, delivery time and guarantees are also checked.

Increasingly, property managers say boards are looking for ways to save money. By offering them savings through central purchasing and new ways to refinance their underlying mortgage and invest their reserve funds, they are hoping boards will not seek to undercut their fees -- or worse yet, find another, cheaper company.

"There seems to be a proliferation of small firms," said John G. Marden, treasurer of the board of 205 East 63d Street. "There's a lot of eager-beaver firms out there. In the course of a year I get anywhere from a dozen to two dozen letters from management agencies. It's not as centered in the large firms as it used to be."

Despite the entreaties, Mr. Marden said the board is happy with its present management company, Heron Management, a relatively young management firm owned by a lawyer and an architect.

With their help, he said, the board has actually reduced maintenance twice -- the high maintenance being the main reason apartments in the building weren't selling.

Since maintenance payments went down, "the market has picked up dramatically," he said. "The market didn't respond until we restructured, and the managing agent helped us with that. The building is being managed much more perceptively."

To one of the partners of Heron, Ronni Lynn Arougheti, co-op management is "a crazy field," in which managing agents are underpaid and underloved.

"After the managing-agent scandal, we thought the management fees would go up to a normal professional level," said Ms. Arougheti, a lawyer. "But we'd go and pitch a building and they'd want us to do all the work we'd say we'd do -- for $10,000 less.

"How many times have I sat at a table and the board will vote the super a $4,000 bonus and I'd put in a $1,500 raise and they'd say: 'Hey, what did you do for us? The super polishes the brass every week and says hello to us.' And on and on, and there goes our raise."

Correction: December 19, 1995, Tuesday An article in the Real Estate section on Sunday about changes in the business of managing residential co-ops and condominiums misstated the timing of reductions in monthly maintenance at 205 East 63d Street in Manhattan. While the board has announced them, they have yet to take place. The article also misspelled the surname of the board's treasurer. He is John G. Marder, not Marden.