LEGAL/FINANCIAL

This year, we have worked on two different files that concerned crime policies and fidelity bonds. In one instance, a board member of a self-managed co-op absconded with hundreds of thousands of dollars. The client advised that the co-op did have a fidelity bond and, therefore, thought that it would be at least partially covered for such a loss. A review of the fidelity bond quickly showed that to qualify for recovery, the person who committed the theft had to be “tried and convicted” in court. While the hope is that the authorities will vigorously pursue the perpetrator, it is the authorities who determine whether they will pursue the case and bring it to trial. Therefore, even though our client would be able to prove a case in civil court, it is not enough for the bond to pay out.

Additionally, there was other restrictive language in the fidelity bond: that only an officer of the co-op who received compensation would be covered. With this type of language, the fidelity bond offered no protection if a board member stole money (a bad recipe in a co-op that is self-managed). In another instance, a managing agent absconded with more than $100,000 of co-op funds. In this instance, the co-op had a crime policy in place. However, the insurance company disclaimed on the grounds that the principal and/or employees of the management company were not “employees” of the co-op. The carrier argued that, even though the management company was employed by the co-op, it is not an “employee,” since it is not a person. We are currently in litigation with the carrier over this interpretation.

Takeaway

Just because a co-op has a crime policy or fidelity bond in place does not mean it is affording the co-op coverage if there is a defalcation. The self-managed building had a fidelity bond for the purposes of protecting it in the event funds were stolen. The board had no managing agent and the board members had unchecked access to funds. However, the fidelity bond they purchased would never have covered theft by directors and officers coverage because they do not receive compensation.

Additionally, the prerequisite that a conviction has to occur before the policy could be paid out is a high bar to recovery. In short, because of the restrictions, this policy was of very little value to the co-op. In the other case discussed, the co-op had crime policy coverage. Since the managing agent has access to co-op funds, it is imperative that a crime policy cover theft perpetrated by an agent. This policy did not unequivocally state that it covers theft by a managing agent. Many policies have the managing agent covered through an additional rider to the policy. The takeaway for our boards is to use an insurance broker who is well versed in insuring co-op and condo communities and can understand the nuances of how your community is structured. Once insurance is placed, have the crime policy or fidelity bond reviewed either by the insurance expert with your managing agent or attorneys.

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I helped a co-op building in one matter and a townhouse owner in another negotiate favorable access agreements with neighboring developers and was able to secure reimbursement for the professional services needed to review the relevant documents and drawings. In each of these cases, it was important for me to pull together the right team of people to assist the client. This included a structural engineer, a surveyor, and others. We then were able to negotiate the terms of an access agreement, which provided for a condition survey, a review of plans, insurance, vibration monitoring, and compensation for damages. Determining your property line between the two buildings can sometimes be crucial, but you cannot assume you know the property line just by looking at the property itself.

Takeaway

My advice to a board is to plan for dealing with a neighboring developer and not be afraid to make some waves. The developers are as scared of the co-op as the co-op is of them, since time spent in court is money. Developers with bank loans do not like litigation. The negotiations must be handled by a lawyer with experience in this area who can pull together the necessary team of professionals and litigate, if need be.

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Bamboozling transfer agents: six attempts. This year, I have seen a record number of attempts to bamboozle transfer agents. Attempt number 1: a shareholder whom we’ll call Amy (all names here have been changed) produced a power of attorney allowing her to transfer an apartment from boyfriend Bob to Amy, without disclosing that Bob was dead and had living relatives/beneficiaries. Attempt number 2: Cindy, the executor of her mother’s estate, sought to transfer the lease and shares to a trust to permit Cindy to live in the apartment without disclosing that her sister, Daisy, had equal rights to inherit the apartment but would receive no benefit from the apartment while Cindy lived there. Attempt number 3: Ed, the beneficiary of decedent Fred, sought to sell an apartment without revealing that the federal government had filed tax liens against Fred in Florida, where Fred had lived in the last years of his life. Attempt number 4: Helen wanted her ex-husband, Ira, removed as a co-owner of their co-op. George, Helen’s lawyer (and also her father), claimed that Ira had consented to the transfer of the apartment to Helen but was not willing to sign any documents. Attempt number 5: Karen wanted the apartment transferred to herself without any documentation from her ex-husband, Larry, because, according to Karen’s attorney, photocopies of 40 pages of court documents “clearly” showed that Karen would be entitled to the apartment. Attempt number 6: Linda, the court-appointed guardian for her mother Mary, sought to transfer Mary’s apartment to Linda to reduce Mary’s assets to qualify for Medicaid, even though the powers granted to Linda under the guardianship were limited to providing for support of Mary, and contained no legal authority to dispose of Mary’s assets.

Takeaway

If any of these transfers had been carried out as requested, the co-op could have been subject to thousands of dollars of valid claims from other parties. Each of these cases involved buildings I represent and none of the transfers were done as requested because I have successfully trained managing agents to recognize that any transfer involving a decedent’s estate, trust, power of attorney, divorce, partnership, corporation, LLC, or other entity form of ownership, or in any other way “unusual” must be handled in conjunction with me as the building’s attorney. I have established a complete set of requirements for each of the described types of transfers: executors must have explicit probate court authorization to sell; federal and state waivers of estate tax liens must be produced, and legal opinions must be rendered by counsel for estates, trusts, LLCs, and other entities. All affected parties not present at closing must be adequately represented by counsel and all documents must be reviewed by me. The cost of the review and the transfer agent’s usual fees are paid by the party involved. Result: the co-op is protected against possible scams.

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I recently represented a purchaser of a high-end prewar co-op apartment who intended to perform substantial alterations, especially to the kitchen and bathrooms. The co-op’s alteration agreement was 25 pages long with 27 additional pages of exhibits, prepared by an experienced co-op counsel over the years. Unfortunately, it had several clauses in different parts of the agreement that were not necessarily consistent and did not address the vagaries of who was living underneath the apartment being renovated or the way the building was originally constructed.

As work proceeded, numerous complaints were received from the owner of the apartment below the one being renovated. He claimed that he was being disturbed by “noisy work” being performed prior to 9 A.M. and after 3 P.M., as prohibited under the alteration agreement. The constant complaint of noisy work became a bone of contention, especially since the occupant of the apartment below worked at home and was a former officer and director of the co-op.

Because of the way the building was originally built, there also were pipes and supporting beams below the bathroom floors that the co-op said had to be replaced as part of any bathroom alteration. This, too, created an issue concerning how to address the noise being generated from this work. An additional factor that was not considered was how to address the extra time required on work that effectively was structural or replacement work. The co-op put a six-month time limit during which all work had to be performed.

Individuals purchasing apartments who intend to do major renovations must be aware of the co-op corporation, the work being performed, and the potential complaints from other unit-owners, especially those who work from home.

Takeaway

The owner of an apartment should communicate not only with the board but also the adjacent unit-owners to make sure that there are no unforeseen issues that would either affect when work can be performed or what issues might arise during the course of the renovation. In this case, since the alteration agreement did not spell out what was considered “noisy work,” it became apparent that operating power equipment or even vacuuming bare floors could be considered noisy work.

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Failure to amass a quorum at an annual meeting is hardly a unique occurrence. However, a board’s repeated inability to achieve this threshold throughout a number of years can adversely affect a building’s operation. Without a quorum, no election or other shareholder/unit-owner vote can be held. The then-serving board remains in office independently without the blessing of its constituency and no vote upon a proposed governing document revision, however essential or desirable, can be conducted.
One condominium board was so vexed by its failure during a five-year period, despite strenuous efforts at proxy solicitation to achieve a quorum, that it requested a meeting to “brainstorm creative methods” to obtain this result. I suggested a raffle with the prize being two months’ worth of common charges. Only those voting in person or by proxy would be eligible to participate. To avoid any accusation that condo funds were being used to elicit additional proxies to stack the election in favor of the “management slate,” I utilized a directed proxy form whereby the issuing owner specifically instructed the proxy-holder as to which candidates he must vote. I also provided an option to instruct the proxy-holder to vote for quorum purposes only. In this manner, the proxy-holder, even if he were supporting the “management slate” did not have the power to vote his own preference but was required to adhere to the issuing unit-owner’s voting instructions.

I issued a formal legal opinion that this process was entitled to protection from the Business Judgment Rule and was not vulnerable to legal challenge. That’s because it’s not inconsistent with the condo’s bylaws, and is not otherwise illegal, not a breach of the board members’ fiduciary duty, and it served the valid communal purpose of facilitating democratic board elections.
We achieved a quorum with 62 percent of the condo’s common interest voting at the 2015 annual meeting, and a new board was elected.

Takeaway

When confronted with a seemingly intractable legal problem, look beyond the confines and limitations imposed by legal doctrine and go outside the box for novel but practical common-sense solutions. More often than not they exist and are just waiting to be discovered.

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Your co-op might be making too much money. Yet sometimes it really can happen: you refinance the underlying mortgage, you refurbish and sell an apartment picked up in foreclosure – and then you have issues with your nonprofit status – and also shareholders wondering why their monthly maintenance is so high if you're rolling in dough.
 
What can you do? Lower the maintenance? Maybe. But if you're Michael Barbara, the 21-year board president of Yonkers' 528-unit Bryn Mawr Ridge Coopersative, you implement a concept that appears to have had no name until he gave it one: a reverse assessment.

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Airbnb rentals have become ubiquitous in cooperative and condominium settings. Not only are short-term stays illegal under New York law, which prohibits the rentals of Class A multiple dwelling apartments for periods of fewer than 30 days, but such rentals also represent a violation of most cooperative and condominium policies. We worked with a number of boards to develop multifaceted approaches to address this issue.
Management was instructed to monitor websites to identify potential violators. Doormen and concierges were reminded of their security duties and advised of the board’s determination to discipline employees who were complicit with violators. New security measures were implemented, such as installing key-fob or biometric entry systems and creating visitor log books. Security cameras were strategically placed throughout the building. Memos were sent to residents advising them that short-term sublets are illegal.
Since short-term rentals are often incapable of legal review – by their very nature they usually end before any cure period afforded under corporate documents has run – resolutions were adopted in cooperatives to declare any repeated conduct objectionable. This would entitle boards to terminate a proprietary lease upon the occurrence of multiple violations without the opportunity to cure. Where warranted, legal action was taken and upon a successful outcome, broadcast to all residents of the building.

Takeaway

Dealing with Airbnb issues is no different from dealing with most of the other governance issues that boards must address. When there is a threat to the overall purposes under which a cooperative or condominium was founded, boards must not only be reactive, but also proactive in their approach. Existing systems, policies, and practices must be carefully analyzed and critiqued. With the advice of the building’s professionals, boards must close loopholes, explore newer methods, take advantage of technology, and build better mousetraps to effectively deal with violators. To maintain control of a cooperative or a condominium requires that it be carefully and constantly monitored and managed. Perhaps the most important aspect of governance is frequent and effective communication with owners as most of them will toe the line if they are kept in the loop, properly educated and informed of the board’s rationale for its policies.

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Watch out — more shots have been fired in the battle between boards and Airbnb.

According to BrickUnderground, San Francisco residents recently voted against a measure that would have changed the way Airbnb operates within the city. The proposition "would have cut down the number of days allowed for a short-term when the primary resident isn't present from 90 days per year to 75. ... Prop F also would have required that hosts give proof of the apartment's authorization for short-term rentals, and submit quarterly reports." The interesting twist is that this doesn't necessarily mean that the citizens of San Fran are coming around to Airbnb — BrickUnderground points out that the result could very well have been the due to the $8 million that Airbnb put towards its anti-Prop F campaign. So, the question for boards is now: will Airbnb take aim at New York City? And more importantly, will they prevail?

Photo credit stigmatize / Shutterstock.com

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A common business issue in the world of cooperatives is that of the historic low interest rates being offered on underlying mortgages and the impact these can have on the financial health of the cooperative corporation. Our firm represented many cooperative corporations during the last year in the refinancing of their underlying mortgages. In this era where doom and gloom are front-page news, the historic low interest rates have provided our clients with infusions of cash, allowing them to effectively avoid maintenance increases and assessments. The key to a successful refinancing is when the cooperative corporation can maintain the same or lower monthly debt service on its underlying mortgage and pull cash out of the new loan. This can be done when the old loan is at a higher interest rate than the new loan. This is often the case when the old loan was secured at a time when interest rates were much higher than the current environment. The new money is then placed in the cooperative’s reserve fund and can be used to fund important and necessary capital improvements without the need of raising maintenance or assessing the shareholders. We have seen our clients use the money to renovate their lobbies, repair or replace their roofs and windows, convert their boilers, and do Local Law 11 work. One thing this new money should never be used for is to balance the operating budget. These funds are an available asset to the building and should be used to increase the value of the building and enhance its physical state.

Takeaway

The board of your cooperative corporation should carefully review the existing mortgage terms. Even if the term of the mortgage is not yet due and there is a prepayment penalty, the refinancing may still be a viable tool to enhance a building’s financial standing. We had several situations where boards did not think their co-ops were candidates to refinance their underlying mortgages. However, once they reviewed the numbers in greater detail, they realized that the refinancing was in the best interests of the cooperative corporations. Interest rates will not stay this low forever and your board should look into taking advantage of these historic low rates.

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When you consider the amount of money that people stand to make by renting out a room in their apartments, you can understand why so many co-op and condo boards have to handle shareholders and unit-owners who want to get in on some Airbnb action. Many of them may ask, "Hey — if my building allows sublets, I can sublet for short stays, can't I? And since the law allows roommates, why can't I rent out my spare bedroom by the day, week, or year?"

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