Extending Credit to Property Management Companies (A Challenge?) By Tom Gannon, CCE Property management is an interesting and challenging business segment. For those with limited or no immediate experience in this area, a property management company is an entity engaged by another legal entity to manage its property. This other business can be an apartment complex or a commercial building or buildings, but the concept is the same. There can also be, and usually are, multiple clients. Sometimes, it is difficult to tell who the players are, much less the rules of the game. A common misconception is that a property management company, even the person in the leasing office, is the one in charge, when, in fact, his or her authority is derived from one of several different contractual arrangements. The issues can be broken down this way: 1. The property is owned by one legal entity and managed by another. This legally falls under the very unique concept of Agency. By nature of the Agency Agreement between the two parties, the management entity is able to make certain decisions on behalf of the property owner. 2. The same Agency Agreement may include restrictions on what the agent can or cannot do, with various checks and balances in place. 3. A property owner may manage the property through that entity s own employees. 4. The property management company may even own and manage properties. 5. The property management company may take full legal and financial responsibility for managing multiple properties, with multiple owners, with no involvement by the various property owners. 6. Either of the entities involved, regardless of Numbers 1-5, can fall under any type of legal organization allowed by a given state s system of laws. (Please remember that this country is a federation of semi-autonomous states, any one of which may decline to accept a certain form of business or change the rules concerning the details of a given business type.) The concept of Agency means that any contractual arrangement entered into by the Agent on behalf of the Owner, within the terms of their mutual agreement, is equally binding on the Owner, even though that Owner does not specifically sign a separate contract with an outside vendor or a lease with a tenant. Simple?? It could be, but Many people do not fully understand this process, sometimes including the Owner and Agent, and their respective employees. To further complicate things, a person s position within any type of company does not necessarily legally extend beyond their job title, or even that person s level of authority within his/ her organization. Someone may have the internal authority to negotiate quotes and job specs, but that same person may not be able to obligate the business to a legally binding contract. This is especially true in a property management scenario. The law is quite specific about what positions are legally able to encumber a specific type of organization, sometimes differing by state. The legal concept of Agency adds more complexity. A so-called Property Manager, as in the person sitting in the rental office, is usually authorized to process apartment lease agreements and issue purchase or service orders for repairs, authorize contractors to do the work and so on. Likewise, a similar position within a commercial operation may do the same. The management company can also purchase materials, and then its employees do the work. They are allowed to do so according to the Agency Agreement with the property owner. 1
It can get worse, when vendors raise issues, either when the Owner/ Agent relationship is not clear, or the vendor simply does not understand the ins and outs of extending open account credit to the participants. Usually, it then becomes the responsibility of the Credit Professional to make the proper decisions and to explain those decisions to others. As an example, this apartment complex is in Las Vegas, which is a huge property management market. It is much larger than shown in this snippet, with multiple pools, covered parking and other amenities. One would assume that its owners signed an Agency Agreement with a top-notch management company, right? Maybe, but maybe not The Credit Application and Sales Agreement is signed, as shown below, by what one would assume to be the property management company, with an attached Credit Information sheet, in place of actually completing every field on the application form. The application appears to be submitted by ABC Apartments LLC: Several issues immediately present themselves, when the signature and the name on the Credit Application, ABC Apartments, LLC, is compared with the signature and the attachment: 2
Is Ms. Smith the president of ABC Apartments, LLC??? No. A Managing Member of the LLC, who may also be given the title of President within the LLC Member Agreement, is who may encumber that Limited Liability Company. Per several business credit reports, Lisa Smith is president of Rooster Cogburn, Inc. d/b/a True Grit Management Company, which is not mentioned on the application form. Rooster Cogburn, Inc. is not mentioned on the attached Credit Information Sheet, but They checked Corporation for True Grit Management only, which is incorrect. Fraudulent? Perhaps, since she appears to be personally acting as Agent, while being president of the property owner. Not her intent, of course, or is it? Obviously, there are some important questions. Before speaking to anyone, including the customer and the Sales or Operations Departments, it is best to do some additional research. First, go to the state s Department of State or whatever the appropriate state may call the office responsible for business registrations. Look up each party, as in the property owner, the management company s corporate and DBA names, and then follow them back to any other state mentioned. The idea is to identify what legal entities are involved, and to confirm that the one with whom you will have a contractual relationship is legally registered. You also want to be able to understand and explain any discrepancies or questions that come up during the investigation and also after you make your initial business credit decision. It does not hurt to also do a comprehensive Internet search on each of the entities themselves. The results for all searches, in this case, provide a character reference on them, so to speak: The property owner is ABC Apartments, LLC, registered in Delaware, not Nevada, but its Managing Members reside in Henderson, a suburb of Las Vegas. The property management company s website identifies that entity as True Grit Management Organization, with no legal entity identifier, AND they are not registered in Nevada. The website identifies their president as Deborah Duke, not Lisa Smith. The parent corporation is registered in California, but not Nevada. The additional research may also provide some interesting subjective information: 3
So, the question of what legal entities are involved in this application for open account credit remains. Very importantly, there are two binding contracts at issue in this property management circumstance, yours and that between the Owner and Agent. Unsatisfactory reviews, and unhappy tenants, may impact cash flow and the ability of the Property Management Company to pay the bills. Also, the presence of 15 companies, some of which list the same people as True Grit Management, in a relatively small building, may simply mean that the owners of True Grit are successful entrepreneurs, or it could mean something more nefarious. That is all part of the business credit decision process, which is up to each vendor. Putting aside concerns about motivation and intent, for the moment, both entities must be properly identified on the Credit Application and Sales Agreement, or else you may face a denial of legal liability in any subsequent litigation. Once you have properly identified the various entities, the type of signature is important. In the example shown, who is the proper liable party? Taking the possibility of fraud out of the picture, once again for the moment, no one is properly identified as such. The front of the Application should be completed as shown below, with the assumption that this LLC legally owns the property. If the complex has a name different from the owner entity, then ensure that they include both. Make sure that the Bill-to includes both as well. This is especially important if the property management company handles multiple properties, which may also have different owners. Even if other owners are not involved, this will reduce billing issues and overdue invoices. 4
Properly executed, the signature lines should be as follows: With the proper entities on the form, confirmed as legally registered to do business in the appropriate jurisdiction and a relevant signature, you at least have a document useable in a court of law. To get that far here, you will need to candidly, yet diplomatically, ask questions, which may, or may not, get the proper answers. Once done, there is still that business credit decision to consider. Do Mechanic Lien rights exist in a property management scenario? Yes, they can exist, depending upon the details and state involved. One important thing to remember is that the complex may actually be condominiums, rather than a set of rental apartments or similar. The possibility of a lien scenario also exists with commercial properties, as in business parks and so on. In condominium circumstances, the individual unit owners are involved, not the complex itself. (In such a scenario, the Home Owners Association (HOA) may hire the management company.) To illustrate, this complex s general address was given to a contractor and, subsequently, to a supplier, for that supplier to directly deliver material to that address, so the contractor could do the work: 5
The contractor did not realize that this is a condominium complex, yet he expected the supplier to protect his lien rights for him, while he remained the good guy, by filing all lien notices and, if needed, the liens themselves. To complicate matters, this complex has 13 high-rise buildings, multiple common areas, 838 condo owners, eight different HOAs and several property management companies! Know your customer! Depending upon what types of materials are delivered, where they are used and in what state this type of scenario exists, that will dramatically impact your lien rights and those of your customer. If the complex is still under construction, that process is even worse, so it is important to understand the specific lien law in any given scenario. Also, if your company is a wholesale distributor, what happens, if there is a catastrophic failure due to an installation or manufacturing issue, and injured parties file a liability lawsuit against it? Refer to federationofcredit.com for information on how to avoid that problem, in advance. Needless to say, a properly executed Credit Application and Sales Agreement is essential, in any circumstance. 6