Automatic 5% annual increase in management contract

We've just received a new proposed contract from our management company. It's an annual contract that states there will be an automatic 5% increase in the fee annually. I don't know if this is typical since this is the first time I've negotiated a contract for this type of service. However, I don't like it. Increases should be earned based on performance which should be reviewed by the Board annually. Is this arrangement typical?

If I were on this HOA's board, I would recommend crossing out this part of the contract; handing it back to the management company; and informing them of this and any other changes. Then I would watch this company like a hawk. I find this an amateur-ish move.

Thanks to everyone for your responses. I've already contacted him and said no. He folded without even saying anything other than "OK". I'm still digesting the proposed contract so I may ask for additional advice later.

Mark,

I can understand the logic behind what you've done. What I can't understand is why we would blindly shell out 5% increases regardless of what their performance was. The way that you word it, it leaves the Board wiggle room if there is a legit issue with how the management company has performed.

What is bothersome to me in this conversation is the almost universal negative knee-jerk reaction to a proposed annual increase. 5% may be a bit much, 2% or 3% is not, given the (allegedly non-existent) rate of inflation.

As the owner of a management company specializing in small condominium associations, expenses from our suppliers increase annually, often with little or no discussion and without, in most cases, viable alternatives. I'm speaking of expenses for personnel, insurance, office space, utilities, vehicle expenses, computers/data processing, office supplies, etc.

Including an annual increase in a contract to cover this fact of life should not devolve into a discussion of whether or not it is justifiable on the basis of performance. If there are performance issues they should be identified and addressed as the year progresses. That was our experience and practice with our teams in decades with a Fortune 100 company.

What say you to the notion of a performance bonus awarded for exemplary execution of the management contract? What would be your reaction to such a clause in a management contract, with defined milestones of course?

Same negative reaction?

It isn't about getting the "cheaper price". It's about NOT providing a mandatory raise to a company that may not deserve it. Are you going to give a raise to a company your not necessarily happy with? Well it's mandatory that you do.

We would never sign a multi-year contract. It would also be our choice if we WANTED to renew or increase the amount we paid the contractor.

I think the OP was correct in finding this in the contract and taking it out. A 5 percent increase is significant. Especially since the HOA itself most likely can't even raise it's own dues 5% yearly without a membership vote. So would it take a membership vote every year to approve the MC's raise?

Absolutely. This has NOTHING to do with getting the cheapest price and everything to do with signing contracts that takes performance into consideration. In our case this management company has been around for years and consistently failed to do their duties. Failure to issue work orders that were needed, failure to fine or warn residents when requested, losing important records that they were suppose to retain, etc, etc. About 6 months ago a new Vice President and a new property manager were brought on board. We have worked hard with them to improve things and to their credit they have really been trying and improving. That is the only reason we even agreed to stay with them.

Mark previously commented that his automatic rate increase was subject to Board review. I could live with that. It's fair. What I can't live with is a company ramming a 5% rate increase down our throat with no checks and balances in place to address performance issues and tie it back to their rate.

THEN, why are they still maintaining your complex?

Meant "managing"

If the contract was for more than one year I would reject that part. It's ridiculous to expect a raise every year regardless of cost-of-living or performance. However, since it is a one year contract any increase would be irrelevant. The only question is what is the fee for the year? If they want 5% more next year, that is a decision to make next year.

As Barbara pointed out, there is a high turnover in this industry. My first two companies I worked for, I was managing 20 properties each. You burn out real fast.

Today, become of technology, I could manage that many. Previously, and that wasn't long ago, they did everything by hand.

You are exactly right. One of the issues that led to their problems was lack of adequate systems to help them manage properties.They have been phasing in a new system and we've already seen improvements in the problems I previously cited as examples.

What I am curious about, and my daughter will find out tomorrow, is the $750.00 really being charged to the HOA, because, if I was that homeowner, I could, for another $1000.00, demand a copy of their financial statements.

WELL SAID!

How about HOA's only increase their dues based on the current inflation rate?

My point is this:

If you distribute a budget with 2%-3% increases in line items for utilities, insurance, alarm system monitoring, legal and accounting expenses, or what have you, only few words will be spoken by owners in dissent. Perhaps some vendor shopping may be in order, if those words are spoken by the Board, all is generally well. The perception on the part of the 98% of the owners who are not involved in the association is the Board is the Board is taking care of us and doing the right things.

If you distribute a budget with a 2%-3% increase in management company expense, or more, the mooing and oinking from the Board, and some owners, will go on for days. Parades and protests. Indignation at social events. Palace coups.

Why is that? In my earlier post I made it clear COLA increases should have nothing to do with perceived performance shortcomings, and I underline the word perceived when discussing performance shortcomings. Do you have measurement systems in place? Are the performance shortcomings perceptions and behind the back whispering or are they measured and documented? In our corporate careers, we were not allowed to deny a baseline salary increase to an employee, unless they were on a performance improvement program.

Why not with a Management Company? Do you document the shortcomings and review them regularly with the Management Company? If not, why not? Uncomfortable? It is the responsibility of the Board to take on uncomfortable tasks.

On the other hand, in our corporate environment, if an employee met and exceeded expectations, he or she was rewarded.

How many of you have sat on a Board which unilaterally awarded a management company a bonus for superior performance relative to the Ts and Cs of the contract? If you are so willing to deny a COLA increase in the contract rate, should you not also have skin in the game, some responsibility to identify and communicate performance issues?

It is my belief the Association as the client has a responsibility every month of the year to evaluate the performance of the management company relative to the contract and bring less than satisfactory performance to the table when it is observed. Not at contract renewal time, and not at COLA adjustment time.

My next comment will likely generate a firestorm of responses. My belief is Boards believe they can and should deny COLA increases because they can, and because they do not have the desire to run the gauntlet of owner push-back with respect to assessment increases.

Perfectly understandable, I am the president of the Board of the HOA in which we live. Our board has increased the assessment two years running as increases in expenses are decreasing the safety cushion in the operating checking account. The push-back has been nasty, even though the assessment had not been increased since prior to our purchase here in 2010.

I venture to say, many Board members are business owners or understand the basic concepts. Their dilemma is running the gauntlet between doing the right thing vis a vis the Management Company and a COLA increase vs. taking the heat for an assessment increase.

If it were only a proposal, and not a contractual requirement, then fine.

This is not how I interpreted the posts before yours. To me, it's odd that you do.

I do not see how you can rationally compare for profit corporations' practices with those of a non profit corporation, except through perhaps naivete.

Do you have in mind some milestones that are reasonably objectively quantifiable? If so, I am all eyes.

The only way a manager can have a balanced workload is if the company hires enough staff or maintains a smaller client load, neither of which they can do if they never increase rates.

You say you must run the HOA like a business? Well the owner of the management company must run his business like a business.

Barbara,
Yes you are correct both are business. Both need to control cost and both need to look for ways to work smarter not harder. I never said any of this is easy.

Your job is definitely one of the tough ones out there. You have 5 members with different agendas many times unreal expectations of what it takes to do the actual job. Then you add to the mix homeowners who love you till they get the nasty gram reminding them that they broke a rule that has been in the CC&Rs since it began. Then they get on Facebook and Yelp and trash you. That is as much apart of the burnout thing as not getting a raise IMO.

I always try and partner with my managers and help them be successful. If they look good the board looks good and vice versa.

Maybe some real numbers would be helpful here.

In my market, the starting salary for a portfolio manager is $39k a year. With experience and certifications, you might get up to $55k.

Portfolio size can range from 7 properties to 20, depending on how short staffed the department is (and they are always short staffed, its just a matter of degree). Even when you have fewer properties, it's only because they are larger, so you still have about the same workload of emails, maintenance calls, delinquent accounts, etc.

These properties may be 70 miles from the office. You will visit each of them at least once every other week, so expect to spend at least two days a week in your car. Mileage reimbursement is maybe 53 cents a mile, which does not compensate for the wear and tear on your car, especially when you have properties under construction and get nails in your tires all the time. Oh and you'll get reimbursed for tolls, eventually, but be prepared to pay up front for those.

Most homeowner boards meet monthly, whether they need to or not. It's in the contract so by golly they are going to drag that manager out to the property to listen to them gossip and argue. 70 miles each way. So figure seven nights a month, you've got a board meeting, and some months, you've got 11 because the quarterly boards are meeting and of course everyone has an annual - or two, if they can't meet quorum the first time.

I've said before - the extent to which boards are actually involved in the association that you see on this board is not typical.

For those 7-20 communities in her portfolio, the manager is preparing budgets, answering all homeowner correspondence, doing inspection drives, sending violation letters, taking owner phone calls, issuing fobs, preparing meeting agendas, preparing meeting packets, reviewing delinquencies, negotiating payment plans, ensuring all common area maintenance is performed, supervising vendors, reviewing invoices, inspecting work that's been done, sending meeting notices, updating disclosures for the resale certificates.

And if you're on the high end of that pay scale, expect that part of your job will be training the endless stream of new managers.

Every single thing that makes a portfolio manager's job easier - software, assistant managers, compliance inspectors, more managers to share the load - costs the management company money. Every single thing that makes the job more tolerable - i.e. more money! - costs the management company money.

So when associations push for lower and lower fees, and no increases, they are keeping this miserable cycle in motion.

And for what?

The largest management company in my area charges a minimum of $1000 a month for management. A 5% increase (they usually do three) is $50 a month. So for the sake of $500, a board would risk having to change management companies (which is going to cost a lot more than $500!) or risk having a manager change every few months because of the working conditions?

The Board's job isn't to spend the least amount of money, it's to spend money wisely. And spending it on a management company that treats its employers well, so that associations have good, well-trained, experienced, and consistent managers - is money well spent.

I will say - before I left portfolio I did get promoted to "senior" manager, and was making $67k - which was unheard of. But my portfolio had properties with some of the largest management fees, and the boards loved me, so it was worth it to the company do pay to keep me around. And currently, I am an onsite manager, and my salary is determined by the board themselves, not the management company. I absolutely ask for a raise every year and I get it. Because I deserve it. And because my salary is a line item in the budget, I stand up in front of the membership at every annual meeting and am more than happy to explain why I deserve it.

You should always have language that allows you to leave a company if you are not happy with the service especially if you have a history of not being happy with the service. As for the price increase you should look at the total cost for the contract for the life of the contract. For example I could charge you $100,000 the first year with a 5% increase each year and that would cost you $315,250 over three years or I could charge you $105,083 a year with no increases and that would cost you $315,250. I would be weary of companies that don't price their services to cover their increased costs over the life of the contract.

There's nothing wrong about fee increases at stages of a business relationship as my board does from time to time when a vendor has approached us w/ a request for an increase and explanation. After all, inflation runs approximately 2% annually and, in my opinion, a long-term business relationship brings stability to an HOA community and that fact, to me, can enhance the value and be justification for a small increase.

These automatic increases are certainly detached from service quality and a freebie that an HOA board shouldn't negotiate away.

The exact wording that I objected to was "Post term 5% annual increases". If anyone who works for an MC thinks this is appropriate I'd be curious to know if you include include this type of clause in your own employee's contracts?

Any thing above a cost of living increase should be negotiated based on performance.

Here it is:

SECTION 7 -- MANAGEMENT COMPANY COMPENSATION

7.01 Management Services Compensation: The total compensation to which Management Company shall be entitled during the term of this Agreement shall consist of a “Management Fee” paid monthly on or before the tenth (10th) day of each calendar month determined as follows:

June 1, 2020 – May 31, 2021: $X,XXX.XX Per Month

Post Term 5% Annual Increase

First of all if you have a problem with the wording then perhaps it's an indication that it shouldn't have been included in the first place. Secondly, unless I'm mistaken the following provision locks the 5% increase in annually. With that said, we could discuss the wording all day long but you and I both know the MC's intent was to get a 5% increase automatically.

SECTION 8 -- COMMENCEMENT, TERM AND RENEWAL

8.1 Commencement, Term & Renewal: The term of this Agreement shall be twelve (12) months and shall commence on June 1, 2020 and, unless sooner cancelled pursuant to the terms of this Agreement, shall be automatically be renewed at the end of the original term for successive one-year terms unless a timely Notice of Termination is given by either party to the other in accordance with Section 8.02 below.