Conflicts of interest

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HOA Management Companies:
Does your management company have conflicts of interest?

January 2010

Your property management company may be taking additional money out of your pocket each month, and you may not have any idea it's happening.

That can happen when a management company has an ownership interest in a service provider—such as a landscaping or maintenance company—that it hires to do work for your association without disclosing its relationship to your board, says Robert White, managing director of KW Property Management & Consulting in Miami, which oversees about 125 associations totaling 30,000-35,000 units. The problem is increasing now, says White, because managers are being forced to take pay cuts because of the bad economy. In response, they're increasingly relying on their subcontractors to make up the difference.

Here's how to protect your association.

It happens too often
"Unfortunately, I see a lot of that," says Matt Zifrony, who advises homeowners and condo associations at Tripp Scott, a Ft. Lauderdale law firm, and who's also the president of a 3,000-home association. "There are probably a lot of instances in which that type of relationship isn't disclosed the way it should be."

When a management company or its owners have a shared ownership interest in another company that provides services to associations, that doesn't always mean your association will always get the short end of the stick. "In some cases, having an affiliated company do work for your community is not only perfectly appropriate, but you have an even higher likelihood of achieving satisfaction because the manager is working with you in another way and wants to preserve that relationship," says Lisa A. Magill, a shareholder and association attorney at Becker & Poliakoff PA in Fort Lauderdale, Fla. "However, if the owners of the companies are affiliated, you may not have the same level of comfort that bids reflect arms-length transaction pricing."

A professional management company should disclose any relationships it has with any companies that may provide services to an association it manages. "I'd like the relationships to be disclosed, and I really think there's a fiduciary obligation on the part of the management company or manager to disclose that relationship if it exists," says Magill. "There should be no reason to discourage the board from hiring that vendor if it's the right vendor for the job. The management company may have the best painter with the most competitive pricing. But if the company has failed to disclose that relationship, there's some trepidation."

Zifrony agrees that management companies should be forthright about potential conflicts. "It needs to be disclosed, but a lot of them don't," he says. "That creates a two-fold issue. The first is the dollars, which is the obvious issue. Is someone going to be pushing you toward a vendor it's financially benefiting from? The other is putting your eggs in one basket. If you have to separate from the management company, you have to separate from the vendors, too, which makes it that much more difficult to separate."

Here's How the Problem Surfaces
How can you lose the benefit of competitive bidding if your management company doesn't handle bids properly? "A lot of our competitors own plumbing, electrical, or insurance companies or landscapers, or painters—all types of ancillary vendors that provide services and products to associations," explains White. "They'll do the management and see that the building needs new paint and just get their vendors in there. Or they'll get bids from other vendors and then tailor their bid around the other bids. That creates a major conflict of interest. Some companies even reward managers for getting those vendors into those associations to begin with."

White admits that his company once had an affiliated company. "We used to own a landscaping company, and it was growing very nicely and was very profitable," he explains. "But the more we learned about this business and the negative aura that's created in the marketplace for the management company when it owns other companies, we decided it was in our best interest to get rid of that company and outsource everything. Now we have no relationship like that with any vendor because we don't think you can possibly give an independent bid and make an independent recommendation if the company you work for owns a piece of another company."

Problems can also arise when management companies bundle services into a single contract. "When services are bundled, it's very difficult to evaluate what charges are applicable to what service," says Magill. "A management company might put a little more fat in one side of the contract to make up for a discount on another portion of the contract. I like all the services to be separately contracted and bid. If you have a problem with one, are you limited to canceling that part of the contract, or do you have to cancel the whole contract? You want to have some flexibility in your ongoing contractual relationships."

Preventing the Problem
There are a number of ways you can determine whether you're getting fair and independent advice from your management company when it comes to outside vendors.

When you do a request for bids for any service, include a question asking bidders to identify all the owners of the company and all the ownership interests those people have in any other companies the association does business with.

Also get a broad range of referrals. "You should not only rely on your managers for referrals of vendors, but you should also get referrals from boards at similar properties," says Magill. "And even if your manager collects bids, also have bids go to an alternative location so that you're reviewing the actual bid that's been submitted for the project."

Also ask that bids be sent in on a certain date so that your management company doesn't get the advantage of compiling all the bids and then using that information to craft a better bid from its affiliated company. Better yet, have all bids sent to a board member, not your property manager.

Finally, ask direct questions. "When you get bids from your property management company, ask: Do you have any type of affiliation or relationship with these vendors?" says Zifrony. Also ask: Do your managers receive any financial benefit for hiring any particular companies?

And make sure you don't allow any room for a fudged answer. "Ask whether the management company has any relationship with the vendor," says White. "Sometimes the management company won't own the vendor. Maybe technically it's the management company's sister company and the manager can truthfully answer that, no, it doesn't own the other company. It's important to know how to ask the question."

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