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Habitat Magazine Business of Management 2021

HABITAT

ARCHIVE ARTICLE

Blow-Up

How good decisions can go bad

 

You’re on the board and you receive what seems like a truckload of complaints from shareholders who are coughing their heads off, thanks to secondhand cigarette smoke wafting up into their apartments. “Smoke Gets In Your Eyes” may be a lovely song, but as a way of life, it’s hazardous – and not just to the health of the shareholders.

The board could be liable. Your lawyer has told you about recent court decisions that have found secondhand smoke a threat to lung and life. And if the board doesn’t act on those complaints, you could be singing another tune, the “Sue Me, Sue You” blues.

Your board, after some discussion, decides that the best course, naturally, is to take the smokers-be-damned-it’s-a-filthy-habit-anyway approach and ban smoking altogether. As president, you proudly announce the decision – and get caught up in a maelstrom of your own making. You manage to unite both smokers and non-smokers alike, the former angry at this heavy-handed assertion of board power, and the latter angry at this unilateral invasion of personal space. If the board can regulate smoking in your apartment, they assert, where will it stop? Does the name Big Brother ring a bell? As a campaign slogan, that moniker is hard to fight. At a raucous shareholder meeting, a resounding “no” vote defeats the proposed change in the proprietary lease.

Later, you hear about another building, which successfully passes a smoking ban with very little brouhaha. The issue appears to be equally controversial at both properties, so why did one proposal sink and the other float?

You may well ask. Boards make controversial decisions every day. Often, it’s not the subject matter per se that ignites the flames (although that does play a role) but how it’s approached. Blow-ups happen – but they can be avoided.

No Smoking: A Staggered Ban

In an era when smoking in public has become the thing not to do – unless you’re one of those standing outside your office building with a group of fellow smokers, braving the wind, rain, or snow to get in your daily puffs – one would think that enacting smoking bans would be easy. After all, city law already forbids smoking in bars, restaurants, and common areas (such as building hallways). It’s just that – well, banning smoking in a person’s apartment smacks of Orwell, the Thought Police, and all the worst excesses of 1984 (the book, not the year).

Nonetheless, a progressive board – or even one that is just listening to shareholder complaints – should consider solutions. At least several Manhattan buildings have tried to address the issue. One has succeeded. How?

The first – and most notorious – attempt was staged by 180 West End Avenue, part of the Lincoln Towers complex, represented by attorney Stuart Saft, currently a partner at LeBoeuf, Lamb, Greene & MacRae. “It was about five or six years ago when two things happened at the same time: a great many people were complaining about secondhand smoke, and someone died as a result of a fire started by a person smoking on a couch who fell asleep,” recalls Saft. The board wanted to take action.

The attorney felt it would be impossible to prohibit smoking entirely in one shot since such an outright ban would invariably result in lawsuits from aggrieved residents who smoked. Instead, he came up with an approach that would only affect new owners who would, in their closing documents, agree not to permit smoking in their units.

“When I suggested that approach, there was a concern that a smoking ban could affect market value,” recalls Saft about the board discussions on the issue. “But there was also a feeling that a smoking ban could possibly add to market value rather than detract from it,” Saft notes. “There is a virtue in being a smoke-free building.”

The board did not consult the shareholders and simply added the requirement as a house rule – an option which made it easier to pass since it didn’t require a super-majority vote by the shareholders, but also harder to enforce than a proprietary-lease infraction.

“The board voted on it on Thursday night,” recalls Saft, “and by Tuesday, someone had leaked the information to the press. It appeared on page B1 of The New York Times – and all hell broke loose. We were besieged by reporters from all over the world. There were trucks from ABC, CBS, NBC, and CNN. I debated someone from the ACLU [American Civil Liberties Union]. It seemed like everyone everywhere wanted to know about this building that had banned smoking – when, in fact, we had not banned smoking. We had come up with a way that, over a generation, would eliminate all smoking. But no one seemed to notice how we had approached it.”

Following the contretemps, the board held the new policy in abeyance. It then polled all the shareholders to see what they thought: some were strongly for it, some just as strongly against. But, before that data could be utilized, the annual election brought a new regime to power – and the newcomers dropped the issue. It has never been brought up again.

 

Another Failure and a Success

Another attempt by a mid-size Manhattan building was equally unsuccessful, but for different reasons: its board overreached, attempting to ban smoking immediately and completely. As described earlier, that board’s unilateral decision inflamed passions and the board – which needed a super-majority to amend the proprietary lease – was unsuccessful.

But a third attempt, by a 20-unit property on Manhattan’s West Side, was successful. According to its attorney, Arthur Weinstein, this board took a more measured approach, following the Lincoln Towers model in format, though not in execution: the board let everyone in on the policy long before there was a vote. “Existing smokers were not affected, but new buyers could not be smokers,” explains Weinstein. “They tried to change the situation gradually.” The policy was approved by 80 percent of the shareholders.

The lessons: Don’t try to change the world at once. Sometimes change must be gradual. Also, remember: to succeed, a controversial idea needs popular support. The West End Avenue building represented by Saft had the right idea – institute a gradual ban – but bad luck: if not for the media firestorm, which engendered a tidal wave of negative publicity for the board and the building, the gradual ban would probably have survived. What the West End Avenue board could have done – which might have helped them weather the controversy – was to do what Building No. 3 did and “sell” the proposal to the shareholders beforehand. “Our board tried to inform everyone in the building in advance, informally talking to the shareholders at different points in the process,” Weinstein notes. Although there was no official meeting to push it, the idea was discussed with almost everyone in the building: questions were answered, fears allayed. Building No. 2, however, did everything wrong: it went for a unilateral, immediate ban – without any “marketing” or conferring with the residents.

 

English Only, Please

In 2005, Seward Park, a 1,728-unit, four-building co-op on the Lower East Side of Manhattan, faced another blow-up. Its board, reacting to complaints from shareholders about maintenance staff members speaking Spanish in front of them, imposed a requirement that the staff speak only English in the presence of the residents. At the same time, it also passed a rule that all radio communications among the 43 staffers be in English.

“It’s a large complex – five buildings, with 20 stories in each – so it is crucial that people be able to understand other people during emergencies,” Fred Rudd, principal of Rudd Realty, the manager for the co-op, says about the radio requirement. “Things happen all the time where communication [in a language that both parties understand] is essential.”

(However, one former member of the board says that he and others opposed the English-only-in-public-spaces policy but that management insisted on it. “No one was in favor of it, but Rudd told us we had to go forward. We were misdirected.” Rudd insists that the board was supportive of the decision.)

A letter sent by Rudd Realty to an employee who broke one of the two rules cited the policy – “You were instructed that all dialogue in public spaces was to be held in English” – and added: “After lengthy discussion, management recommended you enroll yourself in English-as-a-second language classes as a condition of your employment.”

When it became public knowledge, the policy created a controversy. “We’re being harassed,” an employee told the New York Post, who claimed that he had been threatened with firing after being caught speaking Spanish with a coworker in a hallway. A former porter filed a complaint with the U.S. Equal Employment Opportunity Commission.

The board, apparently unprepared for the controversy, has since rescinded the requirement to speak English-only in public spaces, according to Rudd Realty’s attorney, Neal Capobianco of Greenberg Traurig.

Nonetheless, the ham-handed way the first decision was implemented and then changed has left tensions between the staff and management.

Every time there is a decision regarding staff, it is now looked at through the prism of racism, reports the former board member, who stepped down very recently. “You write someone up for something, and now they’ll go to the union, claiming racism. The situation is polarized.”

Significantly, however, the radio ban on non-English communication has been successfully retained.

The lesson: If the shareholders complain about something, don’t overreact. Before leaping into action, take a breath and consider the consequences of your actions. In this case, even though there were complaints about language, the board should not have acted as strongly as it did. Rather than an outright ban, it might have suggested to the staff that it be sensitive to shareholders’ concerns and curtail non-English when it seemed appropriate. On the other hand, a practical rule – once properly explained – can usually succeed. Few could argue with the rationale behind the radio requirement: for safety reasons, it makes sense.

Insurance Required

Safety concerns, however, can sometimes get interlocked with concerns about individual rights. Can a board, for the financial safety of everyone, require its shareholders to have personal homeowners’ insurance on their apartments? All the experts say, “Yes, of course.” But many boards don’t touch it. Controversial? Certainly: many owners may agree to it in principle but then refuse to comply.

“How do you monitor it?” asks Barbara Strauss, executive vice president at York International Agency, an insurance broker. “The buyer may have given you his policy at closing, as you require, but how do you know that they have kept paying the premiums?”

“The requirement is not that difficult to pass. But it does become a tracking problem,” agrees Irwin Cohen, the principal in A. Michael Tyler Realty, which represents a number of co-ops that have such a rule. “You just have to put procedures in place to be sure they renew the policy every year.”

In one co-op, Strauss reports that the building deals with the issue by obtaining the policy itself and paying the premium, which it then charges back to the shareholders. (Before doing this yourself, check with your lawyer or accountant, she adds.) Orsid Realty is examining such a program, reports Eric McPhee, a vice president at the risk management division of the company.

At 110 Riverside Drive, a 169-unit co-op on Manhattan’s Upper West Side, the board successfully instituted a homeowner insurance requirement about six years ago, with a workable supervisory provision. The rule, which requires a minimum of $60,000 property coverage, of which $10,000 is for improvements and betterments and $1 million is for liability insurance, was proposed in the wake of the terrorist attacks of 2001 when safety was on everyone’s mind, recalls Mary Ann Rothman, a board member at the time who is also the executive director of the Council of New York Cooperatives & Condominiums.

The board had an insurance broker give a presentation to the shareholders about the losses an owner could sustain without such coverage and convinced an overwhelming majority of the shareholders that the policy was a good thing. As for enforcement, the board requires that every March the owners must give the board proof that they have renewed their coverage for the coming year.

The lesson: Communicate the necessity of the rule. You can avoid controversy by making shareholders realize it’s in their best interests to get such insurance so enforcement doesn’t become needed.

 

Open Sesame

If democracy is about transparency, then open board meetings are just another part of democracy, right? Well, not if you look at co-ops and condos as corporations dealing with sensitive personal matters that the public at large has no business knowing. But what if the residents are accusing you of acting improperly behind closed doors, of making reckless decisions that fit into personal agendas and not the corporate well-being? What if they toss down a challenge? “If you’ve got nothing to hide,” they say, “open up the meetings!”

That was the charge at one Manhattan building on the Upper East Side, where a board member – who is also an attorney – reports that a dissident group is insisting that the board open up its meetings or face a lawsuit. “We are in the right,” notes the director with a tone of self-righteousness. “So I say, ‘Bring it on.’”

Right or wrong is, once again, not cut-and-dried here. Some argue that open meetings are a plus and that privacy questions can be easily addressed. “This [co-op or condo apartment] is usually a person’s biggest investment, so if they want to attend, I think they should be able to,” says attorney Steve Wagner, a partner in Wagner Davis. “If there are personal financial issues or other private matters, the board can go into an executive [confidential] session. What are the possible downsides if you reserve the right to go into executive session?” He adds that by making them transparent, the meetings lose their appeal to outsiders: “I find that once they are opened up, nobody [outside the board] comes to them.”

Others insist that it is cumbersome having an open meeting with portions that are closed. “When should it be closed? When should it be open?” asks Weinstein. “You need to do it when you’re discussing potential litigation or contract negotiations, or when you’re considering firing someone or are examining a shareholder’s finances. The list could go on and on.” In addition, he notes that discussion within the board is legally confidential; once an outsider is present, however, that protection is lost.

Some professionals argue for a compromise: an open section of the meeting, where general matters are discussed, followed by a closed session.

The lesson: Although a decision may be easy to pass, be aware of the nuances. A new policy may seem like a no-brainer – until you start looking at the issue more closely. Knowing the pros and cons of a choice to switch to open board meetings, for instance, can not only help you in making your choice, it can also help you sell your decision to the shareholders and thus reduce or eliminate controversy and bad feeling.

 

A Four-Step Program

In the final analysis, it is clear to say that for every new idea there can be a new controversy. Often, it is not the policy choice itself – which is usually well-intentioned – that is controversial but the way it is introduced and “marketed” that makes a difference. What steps can you take to avoid the big blow-up?

(1) Look at the necessity. You should do an informal (or formal) poll of the residents to be aware of what issues concern them. “Have a sense of the shareholders’ wishes,” Weinstein says. Conversely, don’t slavishly follow the polls. You may know of issues – dealing with the building infrastructure, for instance, or its finances – that are unknown to the shareholders/unit-owners. “It really depends on whether you see the board as simply responding to the needs of the shareholders or whether it should be coming out in front of an issue,” says Saft. “Sometimes, the board has to say, ‘This is important to a vast majority of residents. We have to deal with it.’”

Saft points out that 180 West End Avenue’s choice to gradually eliminate smoking showed that they were progressive and prescient. “Since then, a number of court decisions have found that there is a danger of secondhand smoke,” the attorney observes. “That puts the boards under tremendous pressure. They could be liable if they don’t take action. My guess is we’ll be seeing more and more lawsuits from non-smokers asking the board to act.”

(2) Communicate. Often a project sinks because the owners are unaware of its urgency and/or importance. A multi-step education process is crucial. “If you sense that the idea is going to be controversial, then you can test the waters,” says Herb Cooper-Levy, formerly executive director of the National Association of Housing Cooperatives and currently director of a major nonprofit housing group. One way to sense controversy is to ask: Are you infringing on an individual’s rights? Are you saying “no” to someone?

If a fight seems to be in the offing, short-circuit it by educating the residents on your rationale. Cooper-Levy adds that doing this also forestalls rumors that can work against you.

Saft, who is president of his Upper East Side co-op board, recalls how they took that approach in dealing with a lobby redesign, one of the most controversial actions a board can take. “We had several meetings with the shareholders telling them, ‘Look, we think the lobby is really rundown, and it’s starting to detract from the overall value of the building,” he says. “We hired an architect and designer and went back to the shareholders and said, ‘This is what we want to do, it’s going to cost half-a-million dollars, and we don’t consider it a luxury but a necessity.’” Thanks to that education process, a vast majority of the shareholders voted for the project.

(3) Find common ground. Compromise when necessary. Cooper-Levy suggests the board set up a “task force” or committee open to “absolutely everyone,” even those against the policy, so that you find common ground. He says you should encourage other voices – even your opponents – to serve on committees investigating the subject or otherwise take part in governance. “That way, even if the policy doesn’t go forward, you’ve gotten others involved in the process. That’s a side benefit.” And they may ultimately see it your way.

(4) Know your constituents. If 90 percent of the building consists of smokers, it is probably not a good idea to impose a smoking ban.

 

“It is important at the end of the process that there be consensus, a meeting of the minds,” Cooper-Levy argues. “In the best of all possible worlds, through an open process, you seek to find common ground so no one feels they’ve lost.” And, remember, he adds, it is not about eliminating conflict but reducing it: “Any time you do something controversial, it’s going to be intrusive. The question is one of degree.”

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