Management Agreements: Good for Both Sides, or Not!
September, 2009Ah, the famous management agreement. We can’t live with it; we can’t live without it.
This is the document that sets out the rules between the building owner and the parking operator. It can be simple or complex. Its purpose is to protect both parties and ensure that there are no misunderstandings when a particular issue comes up.
The management agreement can set forth the amount of money a manager is to be paid, the amount of profit an operator gets from the job, who buys the insurance (and perhaps even where it comes from).
Much is sometimes hidden in those devilish details of the management agreement, and many an owner, at his (or her) peril, doesn’t read the fine print.
Let me give you an example.
In most agreements, an operator is required to give the owner a monthly management statement. This is the ongoing P and L for the garage, showing a complete accounting of all income and expenses for the operation. The owner should review the statement and look at all the expenses and be sure they are appropriate and in line with the management agreement.
I was assisting one owner in a West Coast city a few years ago and was taken a bit aback when I found that the manager’s salary was being paid by two garages.
It seemed that this particular manager was shared by two of the owner’s garages. Fair enough. But his salary was being paid 100% by each. I’m certain it was a clerical error, but it never would have been noticed had I not been carefully reading the monthly statements.
I also caught some supplies. It seems that the operator was frugally buying supplies (paper, cleaning supplies, etc) in bulk and then distributing them out to its various locations. However, the entire cost of the supplies was inadvertently billed to one location. (Can anyone say 20 Cases of toilet paper).
So, what do you do? In a situation where an operator deposits all the money from the garage into their account and then provides the owner with a monthly check, this is a difficult problem. Straightening out the expenses can be an issue.
On the other hand, how can you expect an operator to front the costs of running a garage? If the operator takes over in January and pays the bills for January and then provides an income statement by, say, Feb. 15, you argue over it for a couple of weeks and then cut a check. It can be the middle of March before the operator sees any money. By that time, they are, what, 10 weeks into funding your operation.
Sometimes an operator will advance the money and charge you interest on it, but frankly I see that as unfair to the operator.
I prefer to have the owner advance two or three months’ operating expenses when the contract is signed. Then have the operator place all monies collected in the owner’s bank. Have a reconciliation every quarter or so to ensure that it doesn’t get out of balance.
Another approach is to advance, out of monthly income, a set amount. The operator would place the first, say, $50,000 in his account and the rest collected in the month in the owner’s. If the 50K was too much, the balance could be carried forward; if too little, it could be adjusted in future months.
However, none of this works well if the operator doesn’t get the management reports in on time and if the owner doesn’t review them to ensure they are accurate and reflect what is written in the management agreement.
I have seen situations where the owner doesn’t even read the report, and after a year, I am brought in to review it. They can be accurate to the penny, or there can be errors and mistakes (like those mentioned above) that can amount to many thousands of dollars.
It is extremely important that the reports be reconciled monthly and that any errors be worked out at that time. Trying to solve problems months or even years after the fact, when the garage manager and the building manager may not be the same ones that were there when the issue occurred, can be impossible and often unfair to both parties.
By the way, management agreements are contracts. They can be negotiated. Just because the owner hired a pain in the butt like me to write the agreement doesn’t mean that the operator has to accept it. And there is nothing that says the standard agreement the operator brings to the table is sacrosanct.
Take the time to go through the management agreement line by line. If there are paragraphs you don’t like, change them, challenge them, and write new ones. Remember, you are going to live with this for the term of the contract, and some of the requirements can be unsettling for both sides.
Take this one example –Workers Compensation Insurance. Many operators are self-insured. They don’t go out and buy workers compensation insurance on the open market, but they post a bond and handle claims themselves. But at what cost?
There is a situation where two operators, in the same city, with the same size operations, charge substantially different amounts in workers comp. How substantial? Would you believe 3% vs. 8.5% of payroll? I think the open market charge is somewhere around 4% to 4.5%. In each case, someone is getting a very good deal.