Accounting and Tax Planning Sections

The Operational Review

This Checks-and-balances Process Is a Must for Property Owners

By

Nicholas Yanouzas

Nicholas Yanouzas

Your property manager is awarding significant contracts to related parties.

He or she has changed the name of the payee on a check after the payee has been reported to owners.

Questionable leasing relationships have been developed by your property manager.

These are just some of the insights property owners might see if they were a fly on the wall of property managers who look out for their own best interests, instead of the owner’s.

Real-estate owners commonly hire property managers to run the day-to-day operations of an investment property with an implied trust that their manager will act ethically. A trusted property manager duly performs his or her tasks, and the owner earns the expected return on the investment. Conversely, a less scrupulous property manager takes advantage of a trustworthy owner who does not closely scrutinize transactions of their investments.

MGM Springfield’s plans to launch construction on an $800 million casino project in the spring of 2015 may just provide the confidence needed to inspire new investments in the Springfield area by out-of-town owners gaining interest in a market that is not overpriced compared to Boston and New York. Reviewing the financial operations of a property — the operational review — is often a missed opportunity by owners making real-estate investments. This checks-and-balance process gives owners the power to conduct a periodic review of the activities and transactions conducted by its property manager, details that might get overlooked in the rush of monthly and quarterly closings.

On a recent financial-operations review for a property owner in the Baltimore area, our team exposed various unexpected findings to a rather surprised owner. The owner learned that, upon review of some legal invoices, the property was being sued by the former cleaning company, which cited that the contract with the property was inappropriately terminated. On the same property, the spouse of the property manager owned a construction company that was providing in excess of $500,000 in services to the property without going out to bid and having their invoices paid within 24 hours of submission.

An operational review not only provides exposure to selected transactions, it affords the discretion of a third party to represent the owner when meeting with senior management of the property-management company. This separation allows for a candid and sometimes uncomfortable discussion about the current financial processes and procedures in place. Standardized processes and procedures would be introduced at this meeting, as needed, to provide positive business results for owners, while designing a best-practice model for property managers to implement.

While meeting with a national property-management firm regarding an apartment complex in Boston, it was determined that their process for reviewing tenant applications included a liberal policy on the credit worthiness of prospective tenants. Although this policy was beneficial to improving occupancy, the manager found that they were spending a lot of time and money on collections and evictions. The final recommendation of the operational review allowed the manager to develop a customized policy that protected the interests of the owner, while securing long-term tenants. Now the manager has additional time and resources to devote to the quality of the property, instead of chasing tenants down for rent.

Whether the real-estate investment is new or established, most owners prefer not to pay additional fees for property-management services, beyond the basic contractual terms. Operational reviews can assist owners in drilling down to see how their investment is being managed and what fees to property management are necessary or not. Knowing how assets are being managed, and what all the costs are, allows an owner to make better decisions and ask appropriate questions when selecting a property-management firm.

The ideal outcome for both owner and property manager is to have trust and transparency when issues arise and need to be communicated and resolved. And if that doesn’t happen naturally, then there’s always the operational review to intervene.

Nicholas Yanouzas is an audit partner and head of real estate at accounting and consulting firm Whittlesey & Hadley, P.C., with offices in Holyoke and Hartford, Conn.

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