My biggest management problem

Heard a really interesting interview with Brent Beshore recently that crystalized a big problem we have in our business.

Brent was talking about how he loves the HVAC service business, because, as long as people live in variable climates, they will need machines to maintain comfortable air temperature, and someone is going to get paid to service those machines. That’s a recipe for a stable, non-cyclical business… the type private equity investors love.

Interestingly, though, Brent has never invested in an HVAC maintenance company. The reason is that he has never found an organization that is 100% focused on service. And the reason for that is that the owners of HVAC companies can make a lot more money during economic up-turns by focusing on installation of new machines in new developments. So, their service businesses are always treated as after-thoughts and starved for resources, talent and management attention.

Why are the problems with HVAC businesses relevant to Adaptive?

We are similar to HVAC companies, in the sense that we are really two businesses wrapped together:

  • A development company that is well-compensated by investors for generating well-above-market returns in multifamily real estate in Los Angeles; and
  • A property management company that gets paid at standard market rates to manage buildings on behalf of our investment entities and also third parties owners

The development business is considerably more exciting and profitable than the property management business. It’s creative, the projects are (relatively speaking) over quickly, and the compensation is healthy.

Property management, on the other  hand, is both less exciting and less profitable. Since we and our clients intend to hold our buildings forever, there is no end… every month is a repetition of the month before… collecting rents, helping tenants move in and out, paying bills, taking care of buildings, keeping good records, etc. And, while it’s nice to have recurring revenue, the fees we get for managing buildings are not going to get anyone really excited.

Can you see what the challenge is, from a management perspective? It’s so tempting to devote all of our time and attention to development and ignore our property management business. And yet the management business is the foundation of everything, because, without it, the rent money would stop coming in, the buildings would empty out and fall apart, and we would not be allowed by our investors to continue doing development deals.

So, we, as an organization, are consciously devoting resources and attention to improving property management. Because, even though can be a little boring and is definitely not that lucrative, it’s kind of the foundation of everything else we do.