Conﬂicts of interest
Here is an article from the Internet that is well worth reading.
Does your management company have conflicts of interest?
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.
"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
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
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."
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."
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
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
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
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."
Reprinted from: http://www.hoaleader.com
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