The Power of the Proxy

A proxy - the assignment of your vote to another person - can be written on a napkin or printed on an elaborate form. But it is always a powerful tool. Ask Dennis Pahl. He used the power of the proxy to defang a powerful investor who had kept iron-fisted control of the board at Pahl's 93-unit co-op in Queens. Or ask Philip Hackett. As secretary of the board at 1 Irving Place, a 650-unit Manhattan condominium, he says he was "blindsided" when an unexpected number of proxies resulted in his being replaced.

Proxies work. They are useful tools to gather a quorum and essential in efforts to keep (or to gain) control of a property. "A proxy is important because it gives a shareholder the ability to have a vote cast when he is unable to attend," says Steve Greenbaum, director of management at Mark Greenberg Real Estate. "Without the proxy, it would be virtually impossible to get a quorum at most annual meetings."

In fact, that single scrap of paper can also lead to dramatic changes in the makeup of the board. Directors who misunderstand the power of the proxy can be looking at early retirement or legal challenges to their authority to rule.

WHAT IT IS

Even though the law grants each owner the right to designate another to vote his or her shares, it does not establish any particular form that the proxy must take. It can be written on a simple piece of paper or dressed up in a fancy printed form (see box, p. 12). Nonetheless, it needs to have a few basics:

The date, time, and place of the meeting at which it is to be used. This data is crucial. Without it, a proxy is worthless.

Designation of the proxy-holder. Also important. This is the person empowered to vote the proxy. If this name is left off, all is not necessarily lost, however: some bylaws make provisions for the secretary of the board to vote the undesignated proxies.

Who or what you are voting on. This varies, depending on the type of proxy. If it is "directed" or "limited," then the person whom the proxy represents has indicated how the vote will be cast. Under a general proxy, however, the proxy agent may vote on behalf of the owner without restriction.

Date of the proxy. This is essential, because, in most cases if two proxies come from the same person the one with the most recent date will be the one declared valid. "You frequently will find a number of proxies from the same person," says Alvin Wasserman, director of Fairfield Property Services. "Some owners, just so they don't offend anyone, sign one proxy and then sign another. If the proxies aren't dated, questions will come up at the election as to who has the real proxy."

Signature. This is crucial. All proxies must be signed. A faxed proxy, as long as it has a signature, will be accepted. In one case, a son living in his father's apartment signed his father's signature, which invalidated the proxy. If not caught, such fraud - innocent or not - can possibly invalidate the election. "We have actually brought copies of signatures of the proprietary lease to match against the signature on the proxy," observes Neil Davidowitz, president of Orsid Realty. Wasserman recalls an owner who, when he completes a proxy, has it notarized, "which removes any question of someone fraudulently signing for someone else."

COUNTING THE PROXIES

How the proxies are counted is another important issue, which raises a larger concern: trust. "People might be suspicious if the incumbent board is controlling that process," says attorney Robert Tierman, a partner in Litwin & Tierman, "especially if the election is close."

In large properties facing contentious elections, organizations like the Honest Ballot Association (HBA), Adkinson-Thorne Enterprises, and Independent Tabulators can be useful. Such groups will become involved with a co-op, condo, or homeowners' association at the request of a board, managing agent, or attorney when there is some concern about how an election will be run.

"We tailor-make everything," says Linda Gibbs, executive director of the HBA. "We don't like to walk in and certify elections. We will prepare and mail a whole package, including the proxies." Kelly Brier, executive director of Independent Tabulators, notes that her company can also "do it all. Everything we generate is approved by the client. We will send out a generic proxy, where the voter can sign off [responsibility] to [the proxy-holder], or tick off the candidates [listed on the proxy]."

She continues: "Our role is to make sure that the voting is fair and confidential. We want people to have the ability to vote freely and without fear of it being known that, perhaps, they voted against a neighbor."

Such services do not come cheaply, however, running from $1,000 to $7,000 per election, so, says Don Levy, director of management at Lawrence Properties, only boards with potentially contentious elections need apply.

There are always dramatic stories of how the proxy can be effectively used in board battles. Here are two.

PROXY WARS I: TROUBLE IN QUEENS

When Dennis Pahl bought into The Buckingham in Kew Gardens, he saw a building with a lot of potential. Built in 1939, the six-story co-op had apartments that were large - from 900 to 1,400 square feet - with lovely amenities: high ceilings, beautiful wood floors, and a tree-lined, quiet street, all a ten-minute walk from the F train to Manhattan and a two-minute walk from the Long Island Railroad.

Pahl had lived in The Buckingham as a renter starting in 1993 but moved out in 1997. He returned one year later and bought a unit. "There was nothing quite as good in the neighborhood," he admits. "This was the best apartment I could get for the price."

When he returned, the sponsor still controlled 60 percent of the apartments, and the sponsor-owned management firm, Shefa Realty, was running the building. Most of the owners didn't know what was going on since the five-member board - with two sponsor seats - kept everyone in the dark. There had not been an annual meeting in three years, there were no newsletters, annual financial reports were often delayed by a year, and almost no communication occurred with the residents. Two board members had retired and had not been replaced.

Pahl, an English professor at Long Island University, had no experience in real estate, but he knew that something was wrong. He called the managing agent repeatedly asking about the absence of annual meetings. Finally, he talked to a lawyer who told him that the lack was probably illegal. Pahl threatened a lawsuit over the non-meetings. Apparently, that got the sponsor's attention. Within two weeks, there was a shareholders' meeting.

It was a step, but nothing much changed, since the sponsor still controlled the majority of the board and the shareholders were generally apathetic. They started to take notice, however, between 1999 and 2000 when the superintendent began slacking off: the lawn remained unmowed and the garbage piled up. In two cases, apartments sprang major leaks that went unrepaired for weeks.

The renters in the building subsequently formed a tenants' association, demanding action. The cable station New York 1 telecast a report on the deteriorating condition of the co-op.

Things only got worse. At the 2000 shareholders meeting, the residents were told that the cooperative had an unpaid $102,000 water bill - and, says Pahl, "There were apparently no plans in place to pay it." There was halfhearted talk of a maintenance increase and of refinancing the mortgage, but the sponsor said the latter was impossible because of the nature of the loan. The shareholders were told that the board would look into other solutions.

Pahl, who was growing increasingly more concerned at what he saw, consulted a lawyer, paying for it out of his own pocket. The lawyer warned him, in a letter, that "we had no reserve fund, no cash in and, and an outrageous water bill," Pahl recalls. He added that the co-op's wraparound mortgage came due in 2005 and there was danger of default and of the sponsor taking over the building and converting it to a rental.

In 2001, the board - for no explained reason - did not call an annual meeting. By now, the unpaid water charges had climbed to $189,000. Pahl and 17 other owners formed a group called the Concerned Shareholders to gather enough proxies to alter the makeup of the board - and the direction of the building.

One significant factor helped change the dynamic as well: the original sponsor sold his block of apartments to an outside investor, who in turn began selling the units. As the number of resident-shareholders increased, the power of the investor decreased.

An election was finally scheduled for March 2002. Pahl's group decided it was time to act. Hiring a new lawyer, Ron Gold, a partner in Wagner, Davis & Gold to help them strategize, the reformers began campaigning in January 2002. Citing the dire financials and the threat of foreclosure, Pahl wrote a letter to the shareholders apprising them of the situation and warning them of the dire consequences in the offing.

The group capitalized on shareholder discontent and gathered a large number of proxies. Pahl and two other shareholders spent six weeks going door-to-door and phoning people in what amounted to an old-fashioned political campaign. "People we talked to were very concerned," recalls Pahl. "Most of them had no idea that the water bill had increased to $189,000. They were very attentive and supportive."

Sometime before the meeting, Gold sat down with the investor - colloquially dubbed "the new sponsor" - and worked out a compromise. "The proxy was the controlling thing," observes Gold. "If we could get more of the vote than they [the investor] could in advance, then we could control the meeting. Once we had the proxies, we sat down and worked out a compromise. It was better than fighting. We had economic plans to achieve and we didn't want to make too much war. They were surprised at what we did. No one had ever organized like that before."

"Before the shareholders' meeting, we met with the [new] sponsor and threatened to wipe him out," Pahl says. "He didn't know how many proxies we had, so, to avoid a fight, he negotiated a deal." The board was increased to seven members, with two investor seats, because, Pahl notes, "we wanted to get more shareholder votes on the board." The college-professor-turned-radical was elected president with a slate of reformers. The repair process began.

"Without my husband's altruism, romanticism - idealism - nothing would have been done," argues Luda Pahl. "He paid $2,000 from his own pocket for a lawyer. The inert shareholders would not have done anything without him."

PROXY WARS II: MAD IN MANHATTAN

A different result occurred at 1 Irving Place, formerly known as Zeckendorf Towers. A 650-unit condominium built in 1986, the building led to the renaissance of the Union Square area in Manhattan. The massive structure features four impressive towers and elegantly designed apartments, most with spectacular views of the surrounding area. The amenities when it was constructed included seven-foot high, four-inch thick thermopane windows, a private sun deck overlooking the park, indoor, attended parking, and a health club with a 60-foot-long pool.

In May 2001, Philip Hackett was elected to the board as a reformer. In the views of some, a lot needed to be reformed. The outgoing board had been secretive, and - as is the case in such situations - there were various rumors and complaints circulating among the unit-owners. Hackett points to one issue that came up after the annual financial report was distributed: the staff was being paid $65,000 in overtime.

Another criticism was the renovation of the lobby. "That was a big issue," recalls Hackett. "Originally, it had been gray and lackluster. The board spent lots of money on design mockups that made it look like K-Mart. I ran on a campaign to get the lobby done right. The previous board had spent two years on the issue and got nothing done."

Hackett adds that the superintendent at the time was not a good manager of the staff members. He supervised them poorly and morale was low. "We basically have a good staff," he says. "They just needed to be managed."

With reformer Alison Matochak as president, the seven-member board took on a series of actions to improve the building. Over a two-year period, the board attempted to improve communications. Besides starting a newsletter, it instituted "lobby sits," in which board members would periodically sit in the lobby and answer questions from owners. It participated in an e-mail discussion, as well, and invited the owners to selected board meetings.

Most significantly, a $1.2 million lobby renovation was completed. "People had been screaming about it for years," says a former board member. "We got it done." A new superintendent was hired and he began a crackdown on staff overtime and side jobs. In the wake of the September 11 terrorist attacks, the board also instituted much tighter security measures, including a stringent move-in/move-out inspection and background check on newcomers.

The board took some potentially unpopular actions. "We needed money," recalls one former board member. "Insurance costs were going through the roof. So we were forced to raise common charges." Additional funds were raised by offering the preferred broker license fee to Douglas Elliman, which paid significantly more than what the then-current license fee holder - a resident in the condo - was paying. (The "preferred broker" status means that the broker has an office on the premises and access to the building's mailing list.)

Everything seemed smooth sailing until the 2003 election. Matochak, pregnant, stepped down, and three of the former board members ran for office. At the election, proxies became significant: with a number of nonresident owners apparently voting, Hackett and another of the reformers were turned out of office. It was an upset - and very upsetting.

"I was blindsided," admits Hackett. "Everyone I talked to told me that they were voting for me. I didn't think it was a problem. Everyone I know was floored when the election results came out."

They ought not to have been. Reformers reform but they can make enemies in the process: raising common charges, renovating the lobby, and tightening up on staff (who may complain to residents) can upset the status quo. A determined opposition can then use that animus and go on the campaign trail.

At 1 Irving Place, someone did, knocking on doors and phoning nonresident and resident owners alike, soliciting proxies. If Hackett had realized the danger, he might have campaigned equally hard. (Although, in his defense, the turnout for the previous year's annual election had been low; in this year's vote, it was only the high proxy count that made the difference.)

"It was all above board," says Gary Starr, the condominium's current president. "You can ask for a proxy and a person can give it or not. We typically get a low turnout and the proxies play an important role. That's democracy."

Hackett agrees, at least about it being a democracy: "I'm planning on running again next year. We have a lot of unfinished business." If he does, he needs to remember: gather ye proxies.