It could be your cooperative or it could be mine; this was a co-op in Brooklyn. The board wanted to change the bylaws to ensure greater indemnification rights for the officers. However, the amendment needed the approval of roughly 66 percent of the shareholders — a super-majority. "It wasn't a difficult issue if properly explained," recalls the building's attorney, Steve Wagner, a partner at Wagner Davis & Gold. "Other buildings had made the change without a problem."
Not this property. After the board announced the proposed amendment, a bitter campaign was launched aimed at its defeat. Some dissidents charged that the board was increasing its power unfairly. Others said that it was an unlawful limit on the rights of shareholders. In fact, it was doing neither — it was simply the board's attempt to protect itself from crippling lawsuits. Yet, observes Wagner, "this was a very contentious building and there were some very nasty accusations tossed about. The board did a lot wrong. The amendment should have passed." It didn't.
Now, take another co-op and another issue. This time, the 434-unit Village Towers East in Manhattan desperately needed its windows replaced, a task that would probably cost about $2 million. A Mitchell Lama "limited equity" cooperative, the property had financial restrictions that required a super-majority vote to approve any plan that raised maintenance on the shareholders. After much discussion, much campaigning, and some dissension, the board called for the required super-majority vote on a proposed equity increase. Incredibly enough, 73 percent of the owners voted, essentially, to raise their maintenance.
Two boards, two dilemmas, two vastly different results. What happened?
You might well ask. On the face of it, the consequences of inaction seem obvious. Without the indemnification proposed in the first case, the threat of lawsuits could make it difficult to find volunteers to serve on the board. Without the equity increase requested in the second case, the needed repairs would have to be deferred until they reached crisis proportions, at which point they would be even more costly.
Put like that, getting the super-majority votes sounds simple. The problem is that many buildings do not put it like that. They end up facing super-majority votes — and losing them. "There are many times when super-majorities are needed, and the boards just don't get them," says attorney Robert Tierman, a partner in Litwin & Tierman. Agrees Wagner: "You fail to get a super-majority as often as you get one."
Still, it doesn't have to be so. There are key ways you can take to implement changes.
First, what is a "super-majority" anyway? It is a phrase used in a cooperative's governing documents that varies slightly in its exact definition — it can mean anything from two-thirds to three-fourths of the electorate — but is in place for one reason. It says, essentially, that the issue under consideration is too important for the board to act unilaterally, so the board must consult with and get the approval of the shareholders to proceed. The exact percentage comprising a super-majority is set forth within the document that is to be amended, and that percentage varies from building to building. The three key documents requiring a super-majority vote for revision are the certificate of incorporation, the proprietary lease, and — sometimes, but not always — the bylaws. In limited equity cooperatives, a super-majority is needed to impose equity increases.
"Although a minimum requirement is set forth in the Business Corporation Law for amending the certificate of incorporation, many certificates of incorporation require a higher percentage," explains Arthur Weinstein, an attorney and vice president at the Council of New York Cooperatives. "The only way to determine the percentage necessary and the rules that must be complied with is to check your own proprietary lease, bylaws, and certificate of incorporation."
Many boards shy away from making changes in those documents, however, because of the difficulty in obtaining the required super-majority — after all, it's hard enough getting a quorum at the annual shareholders' meeting, let alone getting about two-thirds of the people together to vote on arcane matters. Yet many professionals are saying that now is the best time to make the attempt.
The reason is clear: many proprietary leases, drafted by sponsors of conversions in the '70s and '80s, are expiring soon and boards must renew them — or face a dilemma: no lease, no loans. Each shareholder has a proprietary lease with the co-op corporation. Banks will not loan to shareholders with shorter proprietary leases than the term of the loan. So, since boards must renew their shareholder leases anyway, attorneys like Weinstein are saying that this is a good opportunity to clean up other areas that are out-of-date, including, for instance, policies concerning sublet fees and flip taxes.
That said, the successful completion of the whole process requires more than just calling a meeting and having a vote. The board must undertake a great deal of time-consuming work, which can take months. It is as exhausting as a political campaign, much less sexy perhaps, but, in the case of many changes, just as important as electing a president. You are, after all deciding your future.
Before proposing anything, a board has to examine the problem, and should appoint an individual or committee to seek out solutions. That search should seek information from both professionals and lay people. The former should include your manager and attorney, both of whom presumably have experience you lack. The latter should include the shareholders. You want to take the pulse of your building. "It is the board's job to find out how the shareholders feel about an issue," says Arthur Davis, a co-op consultant. "The board must always be sure the issue is clearly portrayed and must recognize that there are different sides to the issue."
The meetings between the board members and the professionals can take place over a two- to four-month period as the different options are discussed, analyzed, and accepted or rejected. Village Towers East, the co-op that needed to have its windows replaced, is a case in point. Built in 1968 between Avenues C and D in the East Village, the property had a host of daunting problems: deteriorating windows, a decrepit swimming pool, a rundown playground (which had been closed for six years), and a crumbling garage. Dealing with the difficulties had been deferred until Charles Kubinyi, currently a vice president, was elected and took a persistent interest in getting everything fixed.
"There had been talk about doing the work in the past," recalls Kubinyi, "but there are 434 apartments here; in putting in new windows, how do you pay for them?" Kubinyi investigated three options: raising the maintenance, imposing a special assessment, or passing an equity increase. Since this was a Mitchell Lama, a maintenance increase needed super-majority approval. After much discussion among the nine board members, it was decided that the equity increase made the most sense and would be the easiest to sell.
"We figured a maintenance increase is permanent. An assessment is similar to an equity increase; however it would not raise equity," Kubinyi explains. "If I pay $6,000 more over the next ten years for my portion of the equity increase, when I left I would get $6,000 back in equity. It was the only way we could raise money and give money back to cooperators. Out of the three, it was the best. It just makes sense."
The board proposed to go from $10 to $33.75 a share, paid out over a ten-year period. "It took a little time to decide," recalls Kubinyi, "with some of the members waffling a bit, but it was eventually a unanimous decision. I thought unanimity was important. If we had been a split board, it would have been harder to sell."
In another case, the board of the 92-unit cooperative at 710 West End Avenue decided to revise its certificate of incorporation, proprietary lease, and bylaws. Among other things, the board was concerned about indemnification issues as well as the power to impose fines. The property's attorney drew up a list of areas needing revision and the board spent two months reading, in president Llew Young's words, "the boiler plate and the proposed changes. As you can imagine, it was slow going."
Once a decision to make such changes is made, the second phase begins: publicizing the options and campaigning for the preferred choice. To do that, the board should send out a description of the action it wants to take, usually with a notice of a meeting to discuss and/or vote on the topic. It should be described in a simple, straightforward fashion, and use no more than one page. Include any negatives along with the positives. By raising any possible stumbling blocks, you weaken the ammunition opponents might use against you — and get points for honesty and thoughtfulness.
At 710 West End Avenue, the attorney prepared a short letter explaining why the changes were necessary, and then added a multi-page document consisting of the original provisions and the proposed changes, side by side. "We wanted to clarify to the layman why we were doing these things. We thought it only prudent," Young explains. "A huge amount of legal jargon can engender skepticism and suspicion among the residents. It is important to make them understand that we're doing this for a good reason. It was important that we gain their trust."
The announcement of the proposed changes should be followed by what is, perhaps, the most important step: turning to the shareholders and discussing the possibilities through an informational session. Similar to the annual shareholders meeting, this gathering deals simply with the one topic under consideration. It gives everyone the opportunity to raise concerns — and can also provide useful data to the board.
Announcing a special meeting is also a way of focusing attention on an issue and increasing interest. David Khazzam, vice president at PRC Management, recalls one PRC property that considered a proprietary lease change requiring everyone to have homeowner insurance. The board called a special meeting, announcing in a detailed letter that the insurance carrier would be present to answer questions. Attendance was high.
Attendance was also high at an informational meeting at a 65-unit Manhattan cooperative on West 105th Street. The property was alerted by its professionals that the lease, written in 1974, was badly out-of-date and would expire soon. "We saw that many issues had changed since it had been written," explains Ray Hoey, the building's president. "On subletting, for instance, there were cases where you might need to allow subletting. If you did that, you would also need to put in protections for the co-op. We needed to bring the lease up-to-date."
The board talked to professionals, reviewed other leases, and discussed various options. The directors then prepared a lease with the proposed changes and sent out samples of the new document to all the shareholders well before the annual shareholders' meeting. Questions and answers were raised at the gathering, which was attended by the co-op's lawyer and manager. "There was no opposition," Hoey recalls. "There were questions, but we answered them to everyone's satisfaction." Hoey attributes success to "getting the information out. It then became fairly obvious to people that we had to change the proprietary lease."
At these meetings, you should have experts on hand to sell your idea. That could include an accountant, an appraiser, a lawyer, or any other professional consultant needed to make it happen. Some have used charts, graphs, and power-point presentations.
At Village Towers East, the board prepared for the "sale" of the equity increase idea to the shareholders by having the professionals supply facts and figures. The board then had an informational meeting to present the idea and answer questions. In addition to the directors, the building's architect, accountant, energy consultant, and attorney were all present. Each professional spoke for about ten minutes. One selling point: energy costs were rising and new, energy-efficient windows would save money on fuel costs in the long run. Recalls Kubinyi: "It was the most massive turnout we ever had, maybe 120 to 130 people. It was at capacity, with people standing in the hallway."
STRATEGIES THAT WORK
Contrary to popular belief, you do not have to call for a vote at the time you hold your special meeting. You can hold the informational get-together and, then, stage a later meeting for the actual balloting. There are advantages to this: you have time to "campaign" for the issue and collect proxies, and can also spend more time raising shareholder awareness about the importance of the vote. "You technically keep the meeting open until you get the proxies you need, adjourning sine die [without day], until you get the proxies you need for the vote," explains attorney James Samson, a partner in Bangser Klein Rocca & Blum.
Weinstein cites the possibility of using a consent form to achieve change. To do this is relatively simple: after the informational meeting, the board sends out a written consent form. It then has from 30 to 60 days to gather the super-majority consent. "It takes some of the pressure off," explains the lawyer. "You collect the consent forms and do not have to have an actual vote; you just send out a letter saying, 'We've received 75 percent of the shareholder consent forms and the lease change is in effect."
Consent forms serve the same function as proxies with some crucial differences: they do not require the physical presence of a proxy-holder and there is no voting deadline or prescribed meeting date at which they have to be presented. "A proxy has a tighter time restriction than a consent form," explains Weinstein. "It has to be there by the time of the meeting. With consent forms, you have a 'reasonable' period of time to collect them, which is defined as anywhere from 30 to 60 days. It takes the pressure off. When you're dealing with super-majorities, you need the extra time to persuade, because someone who doesn't vote — for whatever reason — is counted as a no vote."
Gathering a sufficient number of proxies can mean the difference between success and failure. At 710 West End Avenue, as in most co-ops, getting a quorum has often been difficult. For its document-changing votes, to be held at the annual shareholders' meeting, the board made an attempt to get enough proxies to assure success. The directors thought they had enough. But when the no-shows were combined with the "nay" votes of an investor who owned a block of apartments, the changes were defeated. The board went out and campaigned again, collected more proxies, and compromised on some issues with the investor, before calling another meeting and obtaining another — this time successful — vote.
Whether it is to spread information or to gather proxies, nothing beats the pressing of the flesh for getting owners interested in attending a meeting and/or voting. Board member Wendy Baker recalls that fellow director Louise Phillips went door-to-door collecting proxies and answering questions about a proposed flip tax at their 60-unit West End Avenue cooperative. "People had to be independently reached," Baker explains. "We had to show them that a flip tax was needed. Some people were very upset."
Before Phillips began her campaign, the tax seemed doomed. At the annual shareholders' meeting when the flip was first raised, questions came from the floor and many of those present were against it. "We needed a super-majority but all we got was a simple majority," Baker notes. "A lot of people had not sent them in. So that's when Louise went around collecting proxies. She's a real estate broker, a professional saleswoman, so she sold it to the tenants, door-to-door."
Phillips explained to everyone that the co-op needed the money to replace the 75-year-old elevator and make other capital improvements. "If we don't do it now," she would say, "we will have to live with more breakdowns and higher costs."
The broker also pointed out that the board was not taking this step lightly. It had exhausted other funding methods — it had utilized a line of credit — and had saved money by employing government rebate programs (such as the city's low-flow toilet program). With the information in hand, the flip finally passed.
The same campaigning occurred at Village Towers East. In the time between the informational meeting and the vote — roughly a month — the directors followed up with handouts. "Vote Yes for Equity Increase!" read one. In the text, the choice was starkly presented: "Do we want to give the money for the improvements to the banks? Or do we want to give it back to ourselves? An equity increase is like creating a savings account. It would help to alleviate the discrepancy between [the co-op's]'60s-priced shares and today's real estate values. It is a brilliant idea by our elected board for resolution of multiple problems..."
Kubinyi says that he used a great deal of oral persuasion. "Wherever I went among people in the building, I talked about it, to friends, neighbors, anyone who would listen. My wife got sick of the whole subject."
In preparing for the vote, the board also hedged its bets. It didn't give the residents the option of declining to act. They had to choose one of the three alternatives. "We made it absolutely clear that if you vote for it, or not vote for it, we're going to fix the pool, the playground, the garage, and the windows, and that you're going to pay for it," says Kubinyi. "It's just a choice of how you do it." (The board could have imposed the assessment without approval but preferred to pass the equity increase.)
This whole process involves the "three Cs": communication, consensus, and cooperation. "If everyone is apprised of the choices, the amount of rancor generated is generally far less," says Herb Cooper-Levy, a co-op consultant. "It is the politics of communicating: tell them what you want to tell them, then tell them what you told them."
There will often be some opposition. In Kubinyi's co-op, for example, there were those who campaigned against the measure. "A lot of nasty stuff was handed out," Kubinyi says. For instance, one flier warned the co-op's shareholders that "we have a serious problem," going on to say that "while the board members may be nice individuals they are devoid of the skill set that would enable [the co-op] to run effectively and economically..."
In such situations, it is not wise for the board to be dismissive or arrogant. All too often, the boards take the position that it's "them or us" and that builds into a divisive number of constituencies. Boards tend to think what they have decided on is the right thing for the building and pursue it with less communication and feedback than they should. It is a difficult balance to strike.
"You don't want dissidents to defeat you," warns Khazzam. "You should address the concerns posed by dissidents at a public forum. Don't put them down but hold them in high regard. Work with them."
In selling such change, the board's credibility is key. What is the board's track record? Has it been on target in the past? Has it been responsive? When issues come up, get the residents to look at what the board has done on previous projects it has undertaken.
"We were successful because we are not secretive about what we do and why we are doing it," says Baker. "We tell everybody everything and nobody's secretive. Usually the president writes a long letter at the beginning of the year, and presents a report at the annual meeting. I think that has left a lot of good will in our house. For the last four years, we have had a holiday party for everyone. People — renters and owners — get to know each other, and we do not have conflicts between these two groups. Our main strength is that we are very open."
At Village Towers East, the equity increase passed overwhelmingly, with 73 percent of the co-op voting in its favor. "When the votes were tallied, you could see smiles plastered on all the board members' faces," Kubinyi recalls. "We all shared the feeling of knowing we did a great thing."
If you think all this is much ado about nothing, consider the consequences of a "laissez-faire" approach to change. The board avoids making hard decisions, and then cruises along to a crisis. "You then get a major problem and a heavily politicized building," says Davis. Not understanding the need for a proposed change, residents might begin a counter-campaign against the board. Infighting could take place, polarizing the population.
Beyond that, there is a good reason to take these steps: you get a better community and a better decision. Rather than operate in a vacuum, you get to know what the residents want, they get to know what the board is thinking, and all feel that they are working together for the common good.
"Such a process goes to the heart of how a board manages itself with shareholders," says Davis. "It is a matter of how a the board deals with shareholders on an overall basis. Do we try to educate them? The bottom line is how much do the shareholders trust their board? If the board has laid the groundwork, the more the residents will trust them. It ultimately comes down to smaller things. The day-to-day running of the building shows how much the board respects the shareholders. So there will be less concern when the big decisions are made. The time to build bridges is not when you have to cross large chasms. It's all the time."