Vetting new shareholders is a complicated process that
can leave boards open to lawsuits.
The admissions process is easy. “We had interviews with the buyers, but they were very, very informal,” recalls Laural Weintraub, a board member at a 25-unit co-op in Brooklyn’s Boerum Hill. “They did submit lots and lots of documents. There was a big pile of financial documents. And there was information about their dog because they were concerned that the dog might be an issue. But we were so eager to have new owners that there was no question about refusing anyone at that point. We invited them to come and meet with the members, and we had an informal conversation – just finding out a little bit about them and allowing them to ask questions about us. And then we asked them to leave temporarily while we voted, and then we said, ‘Yes, of course.’”
The admissions process is challenging. “The board screening committee sets out to ascertain the financial qualifications of the prospective shareholder or subtenant, and ascertain whether the prospective shareholder or subtenant had good neighbor potential,” notes a board member at a 561-unit Queens co-op, quoting from the multi-paged “admissions guidelines” prepared by the board. “Questions relating to financial qualifications should be structured to determine the purchaser’s ability to comfortably handle: (a) debt service to a lender, if any; (b) maintenance charges; (c) potential increase of special assessments. Questions should be formulated from the review of the financial statement, which is included in the purchase application. Questions can include but are not limited to existing debt or other financial obligations.” The guidelines continue with a detailed series of requirements before admission is granted.
The approval process may seem simple or complex, depending on the board and its outlook, but one thing is certain: if you don’t think through your admissions policy, you can certainly have problems. The most famous example is that of Nicholas Biondi and his board. In that case, an East Side co-op, of which Biondi was the president, rejected a sublet application on flimsy grounds and ended up being sued for racism. After a court battle, Biondi and his fellow directors were found personally liable for thousands of dollars in punitive damages.
While some of the details of that case may be extraordinary (see “Dangerous Waters,” Habitat, February 2005), that doesn’t mean it couldn’t happen to you. And it’s not just about discrimination lawsuits either: it’s also about whether the buyer is going to be a good fit for the building, both financially and personally. In the notorious case of Michael Davis and the 712-unit London Terrace Towers co-op, the board was forced to evict a shareholder because of his inappropriate and at times outrageous behavior, which included having sex with a homeless man in the building’s swimming pool (see “Evicted!” Habitat, March 2005). “It’s a crap shoot,” admits Peter Lehr, director of management at Kaled. “Is that person going to be an ideal shareholder or is that person going to be a nightmare? You never can tell.”
That may be true, but there are ways to reduce the odds that you approve the wrong shareholder. What does a board need to know? What should it ask and what should it avoid? Here are some ways to develop a sound admissions policy.
First, realize that it is perfectly legal for a board to be discriminating in who it allows into the building. “It’s appropriate to find out certain information about the applicant – like whether he can afford to pay his maintenance and how many people will live in the unit,” says attorney Steve Wagner, a partner in Wagner Davis.
Boards can reject applicants for financial reasons, for instance, and base that decision on income, credit checks, residential history, and/or employment history. The rationale is that successful applicants must be able to pay their monthly maintenance charges, special assessments, and mortgage payments. No board wants to accept a buyer who could soon be in default.
There are typical groups associated with “legal discrimination.” Those are: entertainers and celebrities, who are often rejected for membership out of fear for the notoriety and unwanted visitors they can bring to a building; political figures and diplomats, for those same reasons, as well as the fear of terrorist violence; attorneys, for their tendency to pursue litigation and find legal loopholes to avoid maintenance charges or granting boards access to their units; and applicants who have moved frequently, because in the event of another move, the purchase may turn into a sublet situation.
According to experts, a board can reject these and other applicants for any reason permissible under the law. Boards cannot discriminate against applicants for reasons of race, color, religion, national origin or ethnicity, sex, age, marital status (which also includes the number of children in a family), disability, sexual orientation, or citizenship status.
A well-run board will generally have a formal admissions process. That usually begins with the application package. Most request the name; age; residential history; employment and bank history/references; personal references; financial information, including assets, debts, and credit histories; hobbies and interests; interest in board or committee service; and data on the person (or persons) who will live in the unit.
For example, Brigham Park Cooperative, Section 4, a 324-unit property in Sheepshead Bay, Brooklyn, has a fairly detailed application package. After the seller and buyer agree on a price, says Lewis Kobak, the general manager and former president of the co-op, the buyer is required to complete and submit a one-page “preliminary application” with key financial information, including purchase price, mortgage amount, and monthly payment, if any, total annual income from all sources, anticipated balance of reserves remaining after closing, including bank accounts, investments, stocks and bonds, IRAs, 401Ks, and other real estate owned. The building allows financing of up to 75 percent of the purchase price. The purchasers are required to use the co-op apartment as their primary residence.
This information is not verified and is designed for a preliminary review by the screening committee of the board, with a turnaround time of roughly 10 days. After that, a letter will be sent to the seller (with a copy to the buyer), informing him or her that the purchaser is either eligible or ineligible to proceed with the full application package. “This avoids a lot of wasted time, money, and effort for all parties involved, as opposed to starting with the full, verified application process,” explains Kobak.
The Committee Investigates
A screening committee, usually consisting of at least two board members and, possibly, two or three non-board members, should review full admissions packages. A property in Queens, for instance, has guidelines that state: “The screening committee serves at the pleasure of the board of directors. Committee members (a) must be resident-shareholders not unsold[-unit] shareholders, (b) are chosen by the committee chairman and approved by the board of directors. The chairman is appointed by the board of directors and must be a resident-shareholder. Committee members are subject to removal by the board of directors.”
Perhaps the most important part of the application process is a thorough review of the buyer’s financial history. Does he/she have a steady legal source of income? Can he/she afford the co-op charges? Will he/she keep up with the mortgage payments? When a board looks at an applicant’s credit report, it should examine the same information the mortgage lender does, but with a bent toward its own needs. For example, how is the applicant financing the purchase? Does he/she pay rent or mortgage currently? Or, if the applicant has been overextended financially in the past, what has he/she paid off first: debt with consumer purchases or residential debt? In determining whether an applicant can make his or her payments, a rule of thumb, some say, is that an applicant’s debt service should be no more than twice his or her annual income.
“Different boards have different financial guidelines,” observes David Goodman, director of business development at Tudor Realty Services. “Some of them have established for us how much the buyer has to have in the bank – say at least two years’ worth of monthly expenses. Some buildings are going to allow 75 percent financing. Or, the applicant has to have been employed for a certain number of years. Things like that.”
One medium-sized co-op on the Upper West Side of Manhattan turned down two applicants this past year for financial reasons. “These two were much more egregious than the previous person we turned down [a few years ago],” reports the longtime treasurer of the building. “We find we have to be more careful than we might have been in the past. It used to be that bank approvals were enough. If the bank okayed their mortgage, that should have been enough for us. But now the banks are giving away money. It’s shocking to me that some of the people who are presented to us actually qualify for the loans. I always ask, ‘Can they realistically support their payments?’ Because we run a zero budget basically and so, we ask, ‘Can they really earn the money?’”
Since lenders are looser with loans, that means boards – and their managing agents – have to be more careful. “The banks let people through who don’t qualify, as far as I’m concerned,” observes the West Side treasurer. “We had a fervent discussion with our managing agent about vetting people. He said, ‘We have an obligation to show the board any legitimate bid,’ which is true, he does. My comment was, ‘Fine, when you send me the package, why don’t you put in big bold letters, ‘This person is not going to make it.’ Or, ‘Be careful, this person looks very risky.’
“What I look for,” continues the treasurer, “is the ‘income versus coverage’ ratio. What is your after-tax income versus your mortgage and maintenance payments? If it starts going over 50 percent, that’s a real flag for me. The old bank number was 28 percent but that’s changed over time. You should not be spending more than 25 to 30 percent of your income on your mortgage and maintenance. You should also ask, ‘How certain is the income?’ If it’s a person whose salary and bonus are all commissions, that’s a real problem. If you have a bad year, it can be a problem for all of us.”
Management should gather documented verifications of employment, income, mortgage and monthly payment amount, current residence and monthly cost of rent or other charges, and personal and business references. A credit check and credit report should be ordered for each applicant.
“Before I send it to the board, I check to see what’s missing. And we go back to the broker and get additional information,” says Goodman, the manager. “So if, for example, a person has a lot of cash and they’re spending all of their cash to purchase the apartment, and they have a very, very low salary, we know that the board in one building will say, ‘Okay, give us a guarantor,’ or, ‘Make somebody else a co-purchaser.’ So, we tell the broker that before we submit the application. In other cases, we know that some buildings won’t go for that. So we will also go back to the broker and say, ‘There’s no way. You picked the wrong building.’”
After management completes its review, copies of the package are forwarded to the screening committee for its review. The committee examines the application package for financial criteria and then interviews the applicants. This should be the final stage in the admissions process and reserved only for those applicants that pass through the earlier criteria successfully.
“Once we get the package from our managing agent, then we schedule,” says Carolyn Greene, president of a 200-unit Fifth Avenue co-op in Manhattan. “We have monthly meetings on the second Tuesday of every month. So anything that comes in prior to that is considered at that month’s board meeting. Otherwise, it’s held over until the following month, unless there are some extraordinary circumstances. For example, somebody comes in, and they’ve already scheduled the closing, and they’ve got a commitment.”
When meeting the applicants, boards and/or committees should use the interview as a chance to determine the applicant’s compatibility with the co-op and its character. The application package should have taken into account the personal values of the board – i.e., social activities and the potential for involvement – and, therefore, can vary.
That said, when you come to the interview, be careful what you ask. Saying, “You know you have to have a minimum income of $50,000 to live here,” during the interview could offend the applicant and open the board to possible litigation. Instead of asking about salaries, for instance, committees should ask applicants if they are employed and allow room for the applicant to offer details on salary and job stability.
The interview should also include questions by the committee members designed to reveal attitude, knowledge of cooperative living, and general fitness of the applicants as tenant-shareholders of the co-op. The applicants should be given the opportunity to ask and have answered any questions they may have.
“We look to make a determination as to whether or not the individual intends to become a resident of our community, or is just interested in ‘flipping’ the unit,” explains Greene, the Fifth Avenue co-op president. “Because our maintenance fees are very low, that makes our building very, very attractive. And in the past, we have had individuals who have come in, purchased the unit, renovated it, and then ‘flipped’ it. In one case, the very next year. So we’re looking to determine whether or not the applicants have a serious interest in residing in the unit.”
To do that, Greene’s board asks: “How did you find out about the unit? Do you know anyone in the building? What do you know about the neighborhood?” Explains Greene: “These things are all part of assessing the credibility of the applicant. If they’re currently in a one-bedroom co-op unit, and this is a one-bedroom co-op unit and there’s little or no difference in the square footage, that’s suspicious. Or, we’ve had applicants who own homes in New Jersey, Connecticut, and elsewhere, and that’s basically their primary residence. And they know little or nothing about the neighborhood. That’s suspicious. It looks like they might want a pied-à-terre.”
Following the interview, the committee should discuss the applicant and then give a recommendation to the full board, which will vote on the would-be purchaser. A letter will be sent to the seller stating the decision, with copies to the prospective purchaser and the cooperative’s attorneys. If the applicant is accepted, the co-op attorneys will communicate with the various attorneys for the seller, purchaser, and banks to arrange for a closing.
Be terse in denial. “Lawsuit threats come from people who have been rejected, and you know, they’re very, very offended,” Tudor’s Goodman notes. “After all, when you’re buying in a co-op, you’re exposing a lot of intimate stuff to strangers. And you have to be real careful, especially when it does get to an interview, when you realize that they’re nuts or that they’re a personality that’s not going to blend. They’ve already passed the financial part, so that’s a very, very personal rejection. You can’t give a reason. You should see the denial letter that we send: ‘Dear So-and-So, the application that you submitted to purchase an apartment has been denied. Sincerely...’”
Keep accurate – but carefully worded – records of the individual application proceedings. Maintaining proof of a consistent and fair admissions process can only further insulate the board from liability. But C. Jaye Berger, a co-op attorney, warns against including detailed deliberations on an individual applicant. If there are any detailed reasons for the rejection in the records, the rejected party could pick out something on which to base litigation. Nonetheless, include enough information to show that each applicant undergoes the same fair and complete admissions process.
In the views of those who have done it, the main challenges in the admissions process are to:
Be careful not to give the appearance of discrimination. While you should not give reasons for rejection, it should generally be based on financial criteria. “If the board has any real doubts [about finances] and thinks that they might turn down somebody, we recommend that they do that before they interview them,” Goodman notes. “Otherwise, the [applicant] can claim discrimination based on how they look or on something you might ask.” On occasions when you do reject for reasons other than financial, be certain that you have carefully and scrupulously made certain that the reason is not discriminatory. Discuss it with the co-op’s attorney.
Be diligent in completing the application in a reasonable period of time. To ensure that everything runs smoothly, the co-op should set strict deadlines for the filing of forms and ensure that all of have been submitted before reviewing the applicant. Also, announce the dates of the committee meetings and the dates the board will review applicants far in advance so that both the potential buyers and the sellers can make sure they are prepared.
Keep a written record of everything relevant. If you are challenged at a later date, you should have a clear and complete record of all that transpired, including how you reached a conclusion of acceptance or rejection. But be sure it is based on facts, not impressions.
Beware, too, of what is included in that paper trail. “Boards communicate by group e-mail,” Berger notes. “They need to be very cautious about what they say. They may make a flip comment that may be misinterpreted. Keep in mind, these are things that can be retrieved in a lawsuit. So the less said [in writing], the better. Board members are not required to say why they voted against someone. It is best not to document it too carefully.”
Be sensitive in the process. The applicants will probably feel discomfort in sharing their personal and financial information with strangers who may become their neighbors. “We explain up front, at the interview, about the board’s responsibility and the necessity for reviewing, discussing, and questioning their finances and certain personal information,” notes Kobak, of Brigham Park. “We assure them of our policy of confidentiality, including shredding all copies of the application package, except for one copy that is filed in a locked cabinet with very limited access.”
In the end, boards should remember that the approval process is about more than who your neighbors will be. It is also about what kind of community you want to have. Because how you run your admissions process may also be an indication of how well you run your building.