Every player on the team is important, and it's the manager's job to ensure they perform to the best of their abilities. At Pinnacle Realty Management Co., Stan Harrelson, 48, makes sure his team is equipped with the resources and training necessary to get the job done right.
With its clients scattered across the country, this third-party national management company needs to field talent with local knowledge and experience. When it comes to meeting the needs of Pinnacle's clients, "Harrelson tries to look at things like a coach, [asking] who is the best athlete for the position?" explains Jay Martha, director of property portfolio management at Henderson Global Investors, a Pinnacle client. As in sports, not everyone works out in their initial position, and that's what Pinnacle tries to find out and resolve.
"I'm a cheerleader," admits Harrelson, president and CEO of the Seattle-based company, which manages more than 100,000 units nationwide. "I'm the biggest fan of our people. ... I am a fan of their individual success. I love seeing people accomplish things; I love seeing somebody take on more and get excited about what they do."
The purpose of Harrelson's coaching is to give employees the confidence to do their job well. "I have a very good working relationship with him," says Rick L. Graf, Pinnacle's regional president of the Central division. "He's as supportive as I need him to be. If I need him tomorrow to meet with a client, he'll be there. He's a mentor, someone I can bounce ideas off of or share concepts [with]."
And, what really makes Harrelson happy is when new associates join the company and realize they can do more than get their feet wet at Pinnacle. "Once they figure out that the water is swimmable, they're in it up to their eyeballs," says Harrelson. That's what happened when Graf joined the company five years ago. Graf continues to run his division with an entrepreneurial spirit.
"Stan is a very progressive thinker and he is quick to listen," adds Scott F. Mencaccy, Pinnacle's regional president for the West. "Stan will help you size up problems to help you politically and economically work through issues. He's very much a customer service-oriented guy. He really strives to make sure the [clients'] needs and desires are met."
Motivated Service The secret to Pinnacle's success is making its clients feel like they are a No. 1 priority. And that includes everyone – from the two doctors who own eight units in Washington, D.C., to the real estate advisor who owns 13,000 units. Clients needs are met from four regional offices located in Orlando, Dallas, Sacramento and Seattle. "The clients that have been with us for 30 years are just as important as any new client. We have clients that go back to the '70s," says John Goodman, Pinnacle's chairman, who founded the company in 1980 as Goodman Management Group. "Every client deserves our full attention."
The reason for this level of service is simple: Pinnacle's management contracts include a 30-day cancellation notice. "A lot of people would lose sleep if they knew that their entire customer base could give them notice and leave," explains Harrelson. But, he doesn't worry. "If we're doing a good job and the buildings are operating well, things are going to take care of [themselves]."
Doing a good job requires motivated employees, and one of the best motivators is money. Pinnacle places its employees in heavily commissioned environments. "Our multiportfolio managers probably out-earn their competition three to two," says Harrelson. "They sweat the loss of a client."
The payment structure Pinnacle ar-ranges with clients is usually a percentage of the gross revenue – somewhere between 3 percent to 5 percent; the company receives a higher percentage for tax-credit properties. "However, I think owners would be far better served if they [based the fee on] a percentage of the [net operating income] NOI, because that's the true test. It's income after expenses," says Harrelson.
Regardless of how the fee is structured, "if something good is happening for [the owner], then it happens for Pinnacle too," he says. Managers get paid proportionally to what the property has earned, usually 17 percent to 25 percent of the fee, he adds.
For example, if a manager has a building that generates $10,000 per month in management fees and 25 percent of that fee goes directly to the manager, that equals $2,500 per month or $30,000 per year. "If you screw up that account [to] where the client wants to let you go, you've given yourself a hit of $30,000," says Harrelson. "Conversely, if you do a great job and they want you to do the next deal ... you can do very well [financially]."
With the potential to influence their own salary, everybody wants to handle 20 buildings and make a lot of money. The key is having the right number of properties per person. This is where management takes a very active role. "It's critical that we have the right balance in terms of the number of clients and direct reports a manager can handle," says Harrelson.
"Each relationship requires time and we have to ensure there is enough time to cultivate an exceptional relationship," he says. Because of the payment structure, "our people are partners in all the deals that they manage, which makes them better than other property managers," adds Mencaccy.
Meeting the Challenges While money plays a large role in the motivation of Pinnacle's employees, another reason they continue to succeed is because they're having fun, says Harrelson. "[Goodman and I] are just fun loving guys," he says. "We like to laugh. but we take our clients' needs very seriously." And, Pinnacle is no stranger to challenging situations. In 1987, when the company first entered the Phoenix market, it was brought in to lease-up a 1,400-unit portfolio. The developer was two years out on his construction loan, had changed property managers three times in six months, had more than $250,000 in accounts payable (AP) outstanding and the buildings were only 55 percent occupied, recalls Harrelson.
Pinnacle moved an entire on-site team to Phoenix to start turning the property around. The company needed to act fast because the market was beginning a downward spiral.
"We filled the buildings up and we chipped away at the AP as we went. Obviously, [we] got some cooperation from the lender to give us some breathing space and succeeded in the sale [of the portfolio] within nine months," says Harrelson.
Pinnacle filled the units using basic management techniques. "It was management 101," he says. The company created a high customer service-oriented, on-site staff to help fill the community. The leasing presentation became crisp, the property was cleaned and the staff was highly motivated.
A bonus structure also was put in place that gave the leasing staff a flexible dollar amount for leasing a unit above the base rent. Instead of using concessions, "they were very incentivized to beat the targets that we used," says Harrelson. "They were very motivated, because they could make as much as they wanted, and with 1,400 units that bonus could add up quickly." The on-site staff used several strategies to attract and retain residents, from parties and giveaways to resident referrals. These efforts worked especially well since the rest of market had given up, he says. Back then, the leasing offices at most multifamily properties were closed on Saturdays and Sundays and their weekday hours were 9 a.m. to 5 p.m. Manage-ment companies didn't want to staff a property properly because it cost too much money and the market was terrible, says Harrelson. That attitude "was the kiss of death," he says. So, Pinnacle took a different approach. The company opened its doors on weekends and had staff stay late on weeknights, showing units to potential residents as long as it was light out.
"[We didn't] buy into the fact that nothing could be done about the vacancy," says Harrelson. "So we came in and just went against the grain and we were very successful."
Now, Pinnacle has a special group of employees that it uses in drastic lease-up situations, says Graf. "We will ship them to those properties until the units are stabilized and then hire locally or replace [them] from within the organization."
Program of Respect Pinnacle continues to take on bigger challenges than turning market-rate apartments. The company has entered into management of subsidized affordable housing. "Like everything else, tax credits are a huge opportunity for us because they represent a very stable long-term business," says Harrelson.
So, while other companies shy away from the compliance issues and other headaches that come with tax-credit properties, Pinnacle embraces the challenge. The company has a separate compliance department, and its investment managers are trained in how the program works, explains Evelyn J. Danowitz, vice president, asset management at Simpson Housing Solutions L.L.C., a client of Pinnacle's. "[Pinnacle] understands the risk," she says.
One of the main reasons Simpson Housing works with Pinnacle is because Pinnacle understands that different clients have different needs. "[The company] doesn't try to fit us in the same box as everyone else," says Danowitz. Plus, it has a strong knowledge base of how the program works.
The company began working on affordable housing deals in 1994, transforming troubled public housing properties into attractive communities. Pinnacle currently has more than 27,000 units of affordable housing under management, which consists of privatized public housing, bond financed communities and Section 42 Low-Income Housing Tax Credit units.
But Simpson Housing also likes working with Pinnacle because of the consistency it provides, says Danowitz; Simpson Housing's operating statements all show up at the same time, accurate and in a standard, easy-to-use format. And, whether in Pennsylvania or Texas, any new Simpson Housing property can use Pinnacle's management services, she explains. "There are not many national players that are focused on fee business. Most of the national players are REITs [real estate investment trusts]. Some of them do third-party [management], but it's not their main concern," she adds. "I want to be [Pinnacle's] main concern, frankly, and that's what I'm getting."
Brokerage Benefits Part of the problem with being a third-party manager is that you work hard to turn a property around and meet the requirements of an owner, and then all of a sudden the building is sold and you are left with nothing, says Stan Harrelson, president and CEO of Pinnacle Realty Management Co. That's why Pinnacle formed a brokerage division in 1994. Pinnacle no longer wanted to be in the position where "the building [suddenly] goes away and the broker sends you a fruit basket. We decided that there was room for us to insert ourselves into a brokerage position, but on a niche basis."
About 50 percent of Pinnacle's brokerage business is with existing clients. "Our brokerage group is there to help clients expand their portfolio or dispose of some properties," says Scott F. Mencaccy, Pinnacle's regional president for the West. "We like to think of ourselves as a critical part of the investment strategy. We have the capacity to know exactly what is going on in all markets of the country."
Not to mention that property management and brokerage work hand-in-hand, adds Harrelson. "Our brokers are not the used-car variety. We are very selective about who we bring on as brokers, because they are dealing with our clients on the management side. If [our brokers] abuse the relationship it will hurt us in [our] core business," he says.
At Pinnacle, brokers are required to bring property managers into a listing. Instead of creating a situation where managers are disenfranchised because they will lose their management fee, the managers work with the brokers, because they know they will get a percentage of the transaction fee if the property sells.
When a broker shows a client a potential property to purchase, the first thing the client wants to know is what the management people think, explains Harrelson. "Property managers get involved and help to underwrite, do the due diligence and so forth," he says.
"We wanted to have very meaningful relationships with a group of clients who would look to us when they were ready to make a buy or sell decision," says Harrelson. "That's not only rewarding from a business standpoint, but also you get some great relationship opportunities there, and you become part of the clients' extended team."
Path To Success John Goodman, chairman of Pinnacle Realty Management Co., formed the third-party management company in 1980. The company was known as Goodman Management Group, a Seattle-based multifamily company that specialized in managing small local brick buildings and doing some brokerage deals. In 1983, Goodman met Stan Harrelson, now president and CEO of the company, in a recreational softball league. The two men got to know each other over softball and beer. In 1985, "we formed our partnership on a napkin at Denny's," recalls Harrelson. He knew the partnership would work because Goodman was a very talented transactional guy and Harrelson was a systems guy that loved management.
The company has grown and evolved from its early days. When Harrelson first joined the company, a large percentage of the properties under contract were syndicated deals that were 125 percent leveraged. "That over-leveraged situation created large accounts payable at the properties and the company was constantly challenged with vendor bills and no funds to pay them. We started out as a company with 3,500 units and we quit 2,700 units in the first six months [after I] came on board. There was a deliberate step to get away from business that we thought was unhealthy for us. We went 10 steps backward so we could rebuild our reputation," Harrelson says.
Pinnacle began working instead with lending institutions, which at the time were heavily into the repossession scene. "There were a lot of failed condo projects or apartment projects that banks had taken back, and we became a recipient of a lot of that business – taking it over, getting it full, making it operationally sound, and then ultimately brokering it to a client, who hopefully would retain us [as managers]," he says.
But, being a local manager wasn't enough for Harrelson. "Stan was behind the growth of this organization," says Goodman. "Stan is a very hard worker and committed to growing this company. I think it was a personal commitment to himself to make it a national company and a leader in the industry."
Now, Pinnacle represents more than 100,000 units in 41 states. It reached national status, and officially took on the name Pinnacle Realty Management, by joining forces with Phoenix Realty in 1994, which became an institutional partner owning 50 percent of the business. With additional funds from Phoenix Realty, Pinnacle was able to purchase Sovereign National Management Co. in '94, a collection of five regional management companies, says Jay Martha, director of property portfolio management at Henderson Global Investors, a client of Pinnacle's.
"We felt that John and Stan had the basis of a good management company and Sovereign had good, strong regional expertise," says Martha. The joining of the two companies became the foundation of Pinnacle.
Over the next five years, Pinnacle learned a lot from Phoenix Realty and especially Martha and Jim Carter, another Phoenix executive, in terms of institutional disciplines and so forth, says Harrelson.
Goodman and Harrelson eventually bought back the outstanding 50 percent of the company. "When we bought the company back [in May of 2000], we got so fired up that all of a sudden the energy was flowing [again]. We were pumped, and it showed. The enthusiasm rippled through the company and last year was the best year ever. This year, we will double our results of last year," says Harrelson.
Pinnacle knows it's on the path to success because it continually sees growth through word-of-mouth recommendations and new business from existing clients, says Rick L. Graf, Pinnacle's regional president of the Central division. "Our clients have entrusted us with their properties and rewarded us with more properties and business. I think it speaks to their confidence [in us] and our abilities to make [good] things happen."