New York's Cooperative and Condominium Community
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Ethical conflicts among board members
Boards face a potential conflict of interest when a real estate broker wants to serve on the board and continue to sell units in the building. Board members, brokers and attorneys share tips for navigating this potentially prickly situation.
What happens when a building has a number of people who wish to serve on the board and one is a broker? How do boards deal with the potential conflict of interest, and is it okay to just say “no” to someone who wants to be on the board, and continue to sell units in the building?
“First, you can’t prevent a real estate broker from being elected to a board position. They have a right to serve and represent their constituents,” points out David Berkey, a partner with Gallet, Dreyer & Berkey. Second, whether or not the broker will step aside when the board is reviewing a buyer application depends on how the broker and the board police the situation. “The Business Corporation Law tells us what has to be done when a board member is interested in a transaction: it requires full and complete disclosure of the potential conflict of interest and a decision made by disinterested board members.”
The real problem, says Berkey, is the not-so-subtle pressure a seller in a building may feel when listing an apartment without using the broker on the board. “The seller may think, ‘If I don’t use the broker, and the sale comes up before the board, I might have a problem. I could be torpedoed.’”
Jan Feld, a former president of his Park Avenue co-op, worries that the amount of money involved in sales of luxury co-ops can immediately create the appearance of a conflict of interest, whether or not there is one. Recently, says Feld, his co-op had a situation where a broker, married to a board member, sold six of the nine units in the building for sale -- while her husband was serving on the board. The woman did not sell any units before her husband went on the board, says Feld, or since. With a six percent commission on each sale and the average price hovering around $1.5 million, some shareholders were unhappy about the situation, says the former co-op board president.
“When there is so much money involved in commissions, I think the best thing to do is for the board to have as little involvement as possible.” If it is that important for their relatives to earn a living, then the board member should step down, maintains Feld.
Kim Oliver, the president of her 168-unit co-op on West 34th Street, agrees, noting that her board members were unhappy several years ago when a broker on the board began selling mortgages in the building. “We just said that either he gave up his board seat, or gave up his mortgage practice. I don’t care if you are a real estate agent or a mortgage broker. On my board, you can’t deal in the building.” After a few months, the broker stepped down.
According to attorneys at the city’s Human Rights Commission, it is illegal to bar someone from serving on the board of a co-op or condo based on their lawful occupation. The commission says it has not received any complaints from former board members who were asked to resign, and whether the potential conflict of interest makes the position ultimately untenable isn’t something that has yet been handled by the courts.
As a general rule of thumb, “You don’t want to shun anyone who might give the board good input,” points out Greg Carlson, president of the Federation of New York Cooperatives & Condominiums. “A real estate broker or mortgage broker should be allowed on the board, just like an attorney, a managing agent, accountant, or engineer.” With their experience in dealing with building financials, preparing application packages, understanding proprietary leases, and how to handle sticky issues such as subletting, brokers “can add something to the value of the board in making decisions.”
However, adds Carlson, boards need to be on the alert: “I have known cases that occurred where the broker became the exclusive agent for the building, and when there was a deal in which he wasn’t involved, he convinced the people to turn the deal down.” At a minimum, the broker on the board should disclose whenever he or she is involved in a sale and should not be present for the interview. A board’s chief goal, says Carlson, is to maintain the integrity of the co-op corporation. “What you don’t need is the reputation that you have to go to x, y, or z broker, or else you can’t sell in this building. You want to be fair and open.”
It is not unusual, say professionals, for brokers in a building to push their own business to the detriment of other brokers, and use their influence, either through their position on the board or through a relative on the board. Will Hunt, partner and co-president of Coldwell Banker Hunt Kennedy, cites an instance where a broker’s spouse on the board of an Upper West Side co-op actively discouraged other brokers from selling in the building. “That’s the worst situation,” he observes.
Larry Meyers, a real estate broker and former board member in his co-op in the East 60s, says it wasn’t tension from the shareholders that eventually forced him off the board, but the scrutiny from the other board members. Of the seven directors, three supported him and three didn’t, says Meyers, who was the building’s treasurer. “It’s a difficult situation. It really is. It moves over into board members taking sides. I did get the feeling they were probably a little tougher on my applicants than on the others.” At one board meeting, after the issue came to a head, Meyers says he just decided to step down. It was easier than fighting the innuendos underlying the skeptical directors’ questions.
“It’s always a problem” when brokers serve on boards, maintains Marc Luxemburg, a partner with Snow Becker Krauss and the president of the New York Council of Cooperatives & Condominiums. “The broker has access to inside information on who may be selling that may come out in advance of information to the general market. It gives the broker an advantage to get listings by implying that people will receive favored treatment because he or she is on the board.” And, when it comes time to approve the transaction, “it creates a conflict with the broker’s fiduciary responsibility in approving the best people for the building,” points out Luxemburg.
The other potential conflict of interest is that a broker may know of some weaknesses on the part of an applicant – some financials that are not as strong as they appear – that the other board members would want to know about before approving the application. While it wouldn’t serve the interest of a broker/board member to push through an application that wasn’t fiscally sound – in the long run, the whole building gets hurt – the temptation to make a sale, say some attorneys, may convince a broker to keep silent about information the board would consider crucial to deciding whether to approve an application.
Another issue, adds Berkey, is the influence the broker will bring to bear in fixing up the building. “The issue has come up where a broker on the board wants to spend money to enhance the lobby, the hallways, [and generally] spruce up the building to make sales, and possibly make commissions when the financial wherewithal of the building doesn’t call for it. It’s indirect, and within the broker’s subconscious rather than their consciousness, but you don’t think about these things clearly when you are debating whether or not to spend money.”
“Look, there are a finite number of apartments to sell,” says one real estate broker. “Any time a broker is working with a real estate company, they are always told to start with their building first.” So the pressure is on to make a sale, and the potential for conflicts of interest will be heightened if the broker is also serving on the board.
Recently, when the condominium board at 45 East 25th Street was trying to decide what broker to use to sell a condo-owned unit, the board turned to its president, Nick Athanail, to handle the sale. He was selected, says Athanail, because, in the past year, having become a broker, “I have gotten more sales, closed more deals, and gotten the highest prices per square foot” than any other broker, in or outside the building. He feels it is his constant presence in the building that accounts for his success in selling the available units.
“I would never put myself in a position where I would have a conflict of interest,” maintains Athanail. “I was an attorney before I was a broker, and I assured [the other board members] that there would never be any breaches of confidentiality.”
While Athanail says that no one has ever cited his position on the board as the reason why he was chosen to sell an apartment, he points out that in a condominium, it’s the management company that reviews a buyer’s application not the board. A condo board can refuse an applicant only if it is prepared to purchase the apartment itself.
The trickiest part of selling and serving on the board, says another broker, who works for the Corcoran Group, is trying to protect the board’s confidentiality. If the board has discussed a possible common charge increase and a prospective client shortly afterwards wants to know if there will be an increase in the future, the broker says that she often splits the difference. Without giving a concrete answer, “I will try to indicate certain things are possibilities.”
Tom Brooks, a broker who serves on his co-op board on the East Side, says that he doesn’t sell units in the building. He is not allowed to. It was a trade-off when he ran, but he made the decision because the building needs a lot of capital work. “It’s a historic building and it’s really quite beautiful,” but it has problems. “It’s a 1920 building, and we still have direct current.” While he was disappointed he couldn’t also act as a broker, Brooks says he made the right choice. “It was more important for me and my investment in the building to serve on the board. I want to help.”
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