Considering community associations: IREM member shares his strategies on evaluating whether to take on management of these prope

As is common for many of us well established in the real estate management business today, we entered the field by happenstance or because an opportunity came our way.

THIRTY-FIVE YEARS AGO, I WAS WORKING AS A STOCKBROKER IN LOS ANGELES WHEN AN OLD FRIEND OF MINE, JAMES LOOMIS, CPM, CONTACTED ME ONE DAY WITH THE IDEA OF JOINING HIM IN HIS PROPERTY MANAGEMENT BUSINESS. His idea was to expand his firm's base from Orange County, Calif., to San Diego County where he had recently contracted to manage a very large community association. With the stock market in the doldrums, I decided to accept the offer.

In the 1970s, to be considered a professional in the property management industry, you had to be a CPM. Along with the challenges of starting a new division, I was also required by Jim and his father to obtain my CPM designation. I am so grateful they insisted on this endeavor for my career, as the designation and IREM membership have rendered more rewards than I ever could have imagined.

With the new community association management division of our firm in place, we started to reap the rewards of increasing our community association portfolio along with apartments, single-family homes and commercial properties. The condominium market was in its early stages, and we were in a great position to grow.

Despite our increasing portfolio size resulting from our additional community association management business, we soon realized a unique challenge in this particular real estate niche--the community association fees we obtained were relatively low compared to the fees of the other types of real estate we managed. This was the case back then and continues to be true today. Although profits for community association management companies have improved somewhat over the past 35 years, they are still not keeping pace with traditional commercial or apartment management companies.

Thus I can share several ideas and strategies to ensure the business of community association management is well worth your company's time and effort. It may not be as straight forward as management of other property types, but it can certainly become a feasible property type to add to your management portfolio.

UNDERSTANDING FEE STRUCTURES

Management fees for apartment and commercial buildings are typically a function of percentages of rent. An average percentage for both types would be in the neighborhood of 3 percent. On the other hand, community association management fees are predicated on dollars per unit, e.g., $15 a unit. Comparing fees for a 100-unit apartment building with a 100-unit community association discloses an alarming difference. The example below provides the details:

Obviously the variance is significant, and finding other revenue streams within management of the community association is a must. Thus, there are two typical ways senior management for community association management companies generate decent profit margins:

1) Require their managers to oversee a significant number of clients--certainly more than their contemporaries in commercial and apartment management;

2) Concentrate on devising ancillary income sources.

As to the first issue, heavy account loads coupled with the fact that community managers meet with their clients at night (boards of directors of community associations typically hold their meetings in the evening) results in a significant amount of community manager burnout. This management burnout can result in client loss, which when compared to client loss in commercial and apartment management, is significant--most clients in the commercial and apartment disciplines are lost due to change in ownership, rather than manager burnout. For community associations, the turnover rate of property managers and clients is nearly double compared to that of commercial and apartment properties.

The impact of client turnover translates into a loss of revenue, which then spurs the argument for additional ancillary income sources. Ancillary income can include the following services for the community association: postage, photocopying, faxes, transfer fees, extra time at board meetings, extra property inspections, time for handling legal matters, delinquency collection, insurance adjustment, construction management, payroll surcharges, etc. In addition to these income generators, many property management companies have established divisions that provide building and landscape maintenance, snow removal, janitorial and concierge services for high-rise buildings.

Community association management firms can often generate up to 40 percent additional income from their clients from these sources. In my mind, in terms of profits, community association management can be compared to the theater: The tickets sold will probably not cover the expenses associated with the movie; it's the concessions sold that make the difference.

The challenge senior management experiences when selling ancillary income can be quite significant as many boards of directors look at the extra charges in a management contract as an attempt by the management company to nickel and dime the association. Because many community association boards are price rather than quality driven, the totality of extra charges can sometimes be the difference in whether a property management company retains or is awarded an account.

BALANCING ACT

Selling a lot of "popcorn" then is often inevitable but is ultimately not what community association management company executives want to be challenged with. So, should managers not pursue ancillary income options? Or is there a way to achieve a balance between adequate fees and keeping some of those additional income streams? Some managers may have no other choice if they want to secure reasonable profit margins for their companies.

Perhaps the best answer to this challenge is simple--charge adequate management fees. Charging management fees that accommodate the demands of adequately staffing the firm and pay for the other expenses needed for running a business is the pragmatic thing to do.

With all this said, if you are considering community association management, be sure to perform significant due diligence before leaping into this endeavor. Learning how to train and motivate employees is one of the most important tricks of the trade. Extensive training programs will certainly be the norm for successful community association management companies. In addition, be sure to spend some time with a community association industry professional who can provide you with the nuances of this type of management. Local competitors may not want to share a great deal of information for obvious reasons, but IREM Members in other parts of the country may be willing to invite you to spend some time visiting their operations.

Managing community associations can be a significant challenge, but with the right strategies in place these properties can be rewarding additions to your real estate portfolio.

Community Association Management Fee of 100 units x $15 = $1,500

Apartment Management Fee of 3% x $100,000 = $3,000

(Assumes a conservative $1,000 a unit for rents).

The above fees are in no way proposed as a standard; they are simply examples for this discussion.

BY MICHAEL E. PACKARD, CPM [R]

[ILLUSTRATION OMITTED]

Mike Packard (mpackard@associationline.com) CPM, has served more than 30 years in real estate management as a senior executive. He is currently a senior vice president in charge of acquisitions with Associa in Carlsbad, Calif. Packard is a past IREM San Diego Chapter No. 18 President and a former IREM Senior Vice President. He currently serves as a member of IREM's Education Committee.

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