Does your agent have a conflict of interest?
Does your agent have a conflict of interest? By Dan Margulies - Executive director, NABO

Does your agent have a conflict of interest?

By Dan Margulies
Executive director, National Associated Builders and Owners

Sometimes the interests of a managing agent conflict with the best interests of a property owner, co-op board, or building. I am not talking about corruption, but ‘honest’ conflicts.

For example, would you rather pay higher maintenance fees or an assessment, or risk a roof leak? Would you pay more now to save energy and money over the next five years? How about ten years?

An agent who wants to stay employed may not want to tell you to levy an assessment, or, if you are a private property owner, to accept reduced income or a loss for a year. He may not want to encourage new debt that will raise maintenance costs.

The managing agent walks a fine line between doing what’s best for the building and satisfying the needs and wants of owners or board members. In the best of all possible worlds, those interests would be the same. In this world, they are not.

Say you were a single family home owner and you learned that more energy efficient windows would pay for themselves in five years with fuel savings. The upfront cost would be $10,000. You figure you will spend another ten years in the house, you have the money, and you go for it. After ten years, you are $10,000 richer and have a more saleable home.

Now say you are one board member in a 100 unit co-op facing a similar analysis. Only the cost is $200,000, you only have $50,000 in your reserve fund, and your neighbors might stay in the building anywhere from another month to 50 years.

One could argue that the fuel cost savings justify borrowing to fund the improvement, adding perhaps $40 a month to maintenance if you borrowed the full amount for 5 years. Or, maybe you could justify a $2000 per apartment assessment.

The question is: what’s in it for the agent to take a position when, if he does nothing, your fuel costs stay the same except for inflation, there is no controversy with other shareholders or partners, and you don’t know any better?

Obviously, the same analysis will apply to roof replacement vs. top floor leaks and heat loss; boiler replacement, energy control systems, video security, façade work, etc. On top of that, if you have a good agent who recommends sensible changes despite the risk to his job, there will be some owners who question whether his recommendations are driven by other conflicts. For example, they will wonder if the building really needs a new roof or if maybe the roofer and agent have a side deal.

So, what do you do?

Every building needs a long term capital plan and replacement strategy, developed with an experienced agent and consulting engineers. You can’t leave the building’s well being just to an agent’s suggestions – for the reasons stated above – but you can’t afford to waste his or her expertise.

While offering plans in New York require an estimate of required reserves and an engineering report, those numbers aren’t enough. In some other states, co-ops are required to have both an operating budget and a capital budget showing the useful life of every component and reserves or financial plans for timely replacement. The two budgets have to reflect each other. You should do that, but even that’s not enough to deal with improvements that aren’t simply replacement.

By periodically hiring consulting engineers to update your building’s capital plan and condition, you can pave the way for an honest discussion with the managing agent about prudent improvements, and remove the motivations for conflict.