What do you do when you have recalcitrant shareholders who just won’t turn in their maintenance on time? Board members who have struggled with this issue can take heart from the example of two huge Brooklyn co-ops that adopted a “suffer no fools” policy after watching their budgets dip precariously toward the red.
At Clinton Hill, a co-op in Brooklyn, the problem started to escalate in the late 1990s, when board members found it difficult to keep track of collections from the 1,200 units. After their budget went into the red, the board fired its management company and hired Mark Greenberg Real Estate. When he got there, says Steve Greenbaum, director of management, the board was “hundreds of thousands of dollars” in debt. The new agent took a tough line immediately. “We sent out a very strong letter that said, ‘We’re here, your maintenance is due. We need to have your cooperation.’”
For those shareholders who were two months or more in arrears, the management firm promptly turned over its cases to its attorney, who sent them a notice to cure, effectively giving the shareholders three days to comply. For those who didn’t, the co-op took them to landlord-tenant court. It took some doing, but finally, says Greenbaum, the balance sheet moved into the black.
While some co-op boards may favor a “go slow” approach to deadbeat shareholders, Greenbaum and other managing agents maintain it’s best to be firm up front. When shareholders miss a month’s rent, the board should direct its management company to write a letter to the shareholder, warning him that he is in violation of his proprietary lease. If he is late again the next month, the matter should immediately be turned over to a lawyer. “Ninety percent of the people, when you serve them notice through the attorney, will pay you right away,” says Greenbaum. For that remaining stubborn 10 percent, the co-op has to go to landlord-tenant court.
Over at Amalgamated Warbasse Houses, a co-op in Coney Island that Rochelle Captan has managed for 30 years, the board has found its own solution to late-paying shareholders: take away their parking privileges. With 2,585 units, the co-op is just too big to let late-payers slide. When shareholders miss a monthly payment, Captan sends letters about the consequences of being late – they lose their parking spaces, can’t vote in board elections, and lose access to using community spaces. The deadbeats also can’t transfer or sell their apartments, which is a big deal in the co-op, where people are always hoping to move into larger apartments. Captan says the new regulations were adopted in 2004, after the board brainstormed on how to deal with late-payers.
“We just felt we needed more strength behind what we were doing. [The late shareholders] had to be inconvenienced so they knew that we meant what we were saying,” says Captan.
Stan Friedland, treasurer of the board at Seward Park on the Lower East Side, says that his fellow board members learned, much to their chagrin, what could go wrong if a board doesn’t immediately intervene when shareholders are late with payments. For years, Friedland’s 11-member board relied on its management company to handle the problem of arrears. And for years, the management company’s increasingly more laissez-faire style put the co-op deeper and deeper into the red. Finally, in 2000, a slate of reformers (including Friedland) was elected to the board. The first thing they did was fire their old management company and hire their current one. Then they sent out letters warning late shareholders that they were prepared to take legal action if they didn’t pay. And slowly, as in the case of the Clinton Hill co-op, the deadbeats started paying.
The board has learned its lesson. “We watch [the current management company] a lot more than we used to,” says Friedland. His advice to boards that may be tempted to leave the arrears collection in the hands of management: don’t. “You’ve got to be careful. Be up to date on things.” Avoiding awkward situations with shareholders who won’t pay means buying more trouble down the road.
“My suggestion for buildings is that they have zero tolerance for arrears,” says Greenbaum. Unless it is an extraordinary case, such as a shareholder losing a job or suffering a death in the family, the board should expect prompt payment every month. Just as reasonable are situations where a shareholder wants to work out a payment schedule. But it’s up to the shareholder to approach the board, not the other way around. “The theory we have is we don’t go talking to shareholders if they are in arrears,” Greenbaum notes.
Mishandled maintenance collection is the surest way to sink a co-op’s finances, because without the money to pay the bills, the building can quickly go into bankruptcy. The board members have a fiduciary responsibility to safeguard the building’s finances, attorneys point out – that’s the main reason they are elected. They can be held liable if their performance is shoddy.
“The board has to stay on top of collection. You have to read the collections report regularly. As soon as somebody falls behind, you get on top of the situation,” observes Marc Luxemburg, president of the Council of New York Cooperatives & Condominiums and a partner in the law firm Snow Becker & Krauss. “Late fees may be useful for keeping everybody on track, but they really don’t deter people who are chronic or serious offenders. And the way to do that is to tighten your belt and start the legal process.”
If a shareholder falls behind in his maintenance, most proprietary leases have a two-step process for dealing with the arrears. First, a notice is sent from the management company that the shareholder is in default. Typically, say attorneys, you allow the offender 10 to 20 days to cure the problem. If the shareholder hasn’t paid by the following month, a second notice goes out from the attorney, stating that the shareholder is in violation of the proprietary lease and the board is about to start termination proceedings.
Some boards don’t wait to send a second letter on legal letterhead, but have their attorney write a collection letter immediately when a shareholder is late. It may sound tough and unfriendly, “but a lot of boards wait a long time and build up an arrearage that’s so great it can’t be readily resolved,” points out Bruce Cholst, a partner in the law firm Rosen & Livingston. Cholst recommends that, along with the first notice of warning from the managing agent to the shareholder, the board should also send out a letter from its attorney, warning that the shareholder is in violation of his proprietary lease. A warning letter from the managing agent and a warning letter on legal letterhead “tends to send a signal that the board is serious,” says Cholst.
While some proprietary leases include fines or late fees for shareholders who don’t pay their maintenance on time – or their storage fees or car parking fees – Richard Walsh, a partner in Horing Welikson & Rosen, says the quickest way to get a deadbeat shareholder to pay attention is to send the notice of default and then the notice of termination right on schedule. If the shareholder has a mortgage, the letters are also sent to the bank that holds the mortgage, and the shareholder should be reminded that if the case goes to landlord-tenant court and the shareholder loses, he is responsible for the legal fees. “I don’t recommend friendly warning letters,” says Walsh.
Not paying attention to what was happening in their building got the board of 36 East 69th Street Corporation in trouble in the early 1990s, when a shareholder began making unapproved renovations to her apartment. When the board went to court to evict her, it lost. Then, for the next six years, the shareholder began withholding maintenance for the amount that she had paid to defend herself. The board sued again, this time agreeing to a settlement, with the shareholder paying nearly 80 percent of the $200,000 in back maintenance that she owed. It took the board six years to get the back maintenance; it was a long, painful process.
“Boards have to be really, really diligent in putting systems in place and taking immediate action when someone is in arrears,” says Steve Anderson, principal in the law firm Anderson & Ochs. “Shareholders and unit-owners must know the board expects and demands payment – if the board doesn’t take it seriously, why should they?”
The issue is true for boards of managers of condominiums as well. When condo unit-owners stop paying their monthly common charges, the board of managers should be prepared to put a lien on the property, say attorneys. A warning letter should go out, and then if the issue isn’t cured, the lien should be filed. Usually, it’s only after someone files a lien “when people wake up and realize it’s serious,” observes Luxemburg. Once a lien is put on the property, the board has the choice of starting foreclosure proceedings, says Cholst. Before they start the foreclosure proceeding, however, they should know what the value of the property is worth, so the board will get the common charges its owed and any legal fees it incurs if the foreclosure goes through.
While these methods may strike some as strong-arm tactics, but your co-op is your castle, and if you don’t protect its income, you and your neighbors will be left out in the cold.