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REAL ESTATE : Associations

Affiliated firms' use questioned

September 21, 2008|Stephen Glassman and Donie Vanitzian | Special to The Times

Question: Hard-pressed to keep costs down and to control overspending, my board decided to review all association contracts. They found two provisions in the management company contract that the attorney says we should have deleted before signing.

One says the management company owns a building maintenance company that "provides certain maintenance services for the association" and discloses that some of the shareholders of the management company are also shareholders of the building maintenance company.

The other says the management company owns a lien services company that "may provide certain delinquent assessment collection services, such as certified mailings of Notice of Default and Recording of Liens." It discloses that some of the shareholders of the management company are also partners of the lien services company.

Is the attorney correct and how do we find out how much money these provisions have cost us?

Answer: It's not that these two provisions/disclosures should have been deleted, but that they protect the management company, not the association.

What the management company is saying is that they refer business to their affiliated companies and make a profit from both. This allows a situation that could result in lax vendor oversight and excessive vendor use.

Since the board signed the contract, it should have demanded a reduction in management fees because the company makes up the difference when it hires affiliated service companies. This potential "double dipping" may be the management company's typical practice, but it does not have to be approved or paid for by your association. It also illustrates why the board's due diligence before signing a contract would have paid off.

If you are already subject to this contract, seek bids from other contractors who are not affiliated with that management company. Compare the services, bids and prices provided against the management company-owned businesses and affiliates.

Before hiring any vendor, including a management company, your association should be seeking at least three bids for each proposed vendor category. That would mean three from proposed management companies as well as other service providers. As it now stands, the management company has little incentive to seek out the best vendors; likewise, since the affiliated vendors are likely to get the job, they may not be motivated to do their best work.

The attorney should have drafted a clause prohibiting the use of any vendor or company with which the management company shares any interest. The board should not have the added burden of policing relationships among management-owned vendors.

It is up to the board of directors to make the decisions on hiring vendors. The board must review the bids and quality of work, perform the due diligence and make the business decision on whom to hire. The disclosure of the management company's conflict should be more than reason enough to use other vendors for those services.

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Send questions to P.O. Box 11843, Marina del Rey, CA 90295 or e-mail noexit@mindspring.com.

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