New York's Cooperative and Condominium Community

Habitat Magazine Business of Management 2021

HABITAT

ARCHIVE ARTICLE

Inside Out

A white-brick Upper East Side co-op. An entrenched board playing by its own rules. A chance meeting at a cross-stitching group. All elements that led to turning a building inside out

 

In some New York co-ops and condos, the people serving on the board of directors turn out to be a lot like house guests and cockroaches: once they settle in, it can be devilishly difficult to get rid of them. While it may be hard to dislodge an entrenched board, it is not, as Jennifer Gill learned,
impossible. Gill’s is one of those New York co-op stories that has it all: ego, power, money, acrimony, moments of surprising grace, and just the right dose of that most
crucial spice, serendipity.

 

The story began to unfold in 2004 when Gill, a 32-year-old office administrator, and her husband, David Witzel, a web developer with Yahoo.com, decided to quit renting and take the plunge into home ownership. They found a suitable one-bedroom apartment in a well cared-for seven-story brick building at 225 East 76th Street. There was an awning out front, a marble lobby, a live-in super, and 43 apartments, all but five of which belonged to co-op shareholders. In February 2004, Jennifer and David took a deep breath and plunged in.

A year and a half later, Gill realized that the promised “annual” meeting of the co-op’s board of directors had not yet taken place. She got the runaround from the board president, Bella Wagner. The management company told her it was working on it. As months went by and no meeting was called, Gill started noticing unsettling things. The co-op was on its third management company since she’d moved in. The live-in super, citing conflicts with Wagner, had quit and moved out. Whenever a board member quit, Wagner simply appointed a replacement. Perhaps worst of all, Gill learned that the roof had been leaking for at least a year and nothing had been done about it.

Although she didn’t know it at the time, Gill was confronting the classic warning signs that her co-op was being run – and run into the ground – by an entrenched board.

 

Getting Involved

“I really didn’t want to get involved,” recalls Gill, who grew up in tiny Oxford, N.C., and moved to New York 13 years ago. “But after the board president confronted me and told me I was being stupid and crazy, it upset me. I knew that, by law, we were supposed to have an annual meeting, and I wanted to see what we had to do to call a meeting and have an election.”

As it happened, Gill belonged to a needlework group also attended by attorney Theresa Racht, a partner at Racht & Taffae who had recently taught a seminar called “Breaking the Grip of an Entrenched Board” for the Council of New York Cooperatives & Condominiums. At Racht’s suggestion, Gill started doing legwork, reading the Business Corporation Law and various co-op periodicals, steeping herself in the mechanisms for calling an election. Gill also took Racht’s advice and invited neighbors to her apartment – discreetly – to see if anyone else had grievances about the co-op’s deteriorating condition.

“Half of the shareholders showed up,” Gill says, “and everyone in my living room was irate about this woman [Wagner]. It was bad, but it was the best thing that could have happened.” Bella Wagner also appeared that night at Gill’s door, uninvited, but was rebuffed. There was no turning back. This was war.

Gill and her confederates got busy. While pressuring Wagner to call an annual meeting, they put together a slate of seven disgruntled candidates (including Gill) and urged all shareholders to show up when a meeting was called, rather than voting by proxy, so they could hear the candidates speak. They also approached the building’s sponsor, who owned five apartments and thus controlled a bloc of potentially crucial votes. They asked that he designate his proxy votes to the seven new candidates, and initially he agreed to do so.

Meanwhile, the atmosphere in the building was turning toxic. There were confrontations in the hallways, arguments, shouting matches. Mail started disappearing. Ethnic slurs were stuck to walls. “It was so evil,” Gill says.

Finally bowing to the pressure, the board called a meeting for December 6, 2006. Attendance was high; tempers were higher. It was a bruising, four-hour slugfest. When the smoke cleared and the written ballots were tallied the next day, four of the seven opposition candidates – a majority of the seven-member board – had been elected. Gill was not among them, but she didn’t care. Her side had won the war.

The new majority promptly elected one of their own, Howie Friedman, as president and demoted Wagner, who had been re-elected, to treasurer. Then they got busy assessing needs and establishing priorities. It quickly became apparent that the building had deteriorated to the point that half-way measures would not be adequate. That meant the co-op needed to raise money. There was a $20 assessment per share – though no maintenance increase so far – and long-overdue work was finally begun. The leaky roof was fixed. Exterior bricks are now being re-pointed and window lintels are being repaired. The marble lobby was polished, which Gill calls a surprising “morale-booster.” The change was so dramatic, in fact, that the original super moved back in.

Perhaps the most remarkable thing about this turnaround is how little it cost the shareholders.

“We were fortunate in that we didn’t need any financial outlays to fight this battle,” says Gill. “We had some pro-bono advice from (Racht) and then used the internet to research, research, and research what we needed to do. It also probably didn’t hurt that so many people were personally upset with our old board that it wasn’t hard to convince people that a change was needed.”

Which is not to say that the co-op’s finances were in good shape when the entrenched board was finally ousted. They were not. “The most frustrating part of the whole assessment issue to me,” says Gill, “is that for years we listened to the old board tell us how great they ran everything. ‘We don’t even need a maintenance increase!’ they would say. It turns out repairs were just put off altogether or the reserve fund was dipped into to avoid having to do a maintenance increase. It makes absolutely no sense not to pass along the rising costs of fuel, labor, materials, etc., to the residents. That’s why we pay a maintenance fee.”

There was one other major change. Bella Wagner, the former president, resigned from the board last year. “I left because I had done what I set out to do,” says Wagner, 35, a self-employed public relations consultant who served for six years, three as president. Specifically, she cites a refinancing of the co-op’s mortgage in 2005 that, she says, obviated the need for a maintenance increase. But Wagner also admits to a “difference of opinion” with the new board. “I just decided they had a different agenda,” she says. “And I was exhausted, really.”

And what of Jennifer Gill? At the prodding of friends, she reluctantly ran for a seat on the board during the co-op’s second annual meeting in December 2007 and was elected. Looking back, she’s now glad she went to war. “It was an emotional roller-coaster,” she says. “I’ve never been attacked so personally in my life. I come from a small southern town where everyone knows everyone else. But now I feel it was a good thing that I endured the name-calling and nastiness. The most important thing I discovered is that if you want your home to be better, you’ve got to get off your butt and do it yourself. When it becomes clear that something’s wrong, you have to be willing to do some of the dirty work to fix it.”

Today, the feeling at 225 East 76th Street is that the co-op is on the right path. “When things started getting clean and nice, I wanted to spend time at home again,” Gill says. “One result of all this is that I got to know my neighbors. And we like each other. It’s nice.”

 

HABITAT SIDEBAR

Entrenched vs Long-Serving

Where boards are concerned, there’s a crucial difference – and warning signs.

All things considered, the shareholders at 225 East 76th Street were lucky. Through a mix of serendipity and grit, their homes and investments were saved from potential ruin. Instead of counting on similar good luck, however, other co-op and condo residents (some of whom may be in the minority on a board) are advised to acquaint themselves with the nuts and bolts – and the hard work – required to dislodge an entrenched group.

Theresa Racht, a partner at Racht & Taffae and the attorney who advised Gill and her neighbors, says the first thing disgruntled shareholders need to do is define their terms. In the world of co-op and condo boards, “long-serving” is not always a synonym for “entrenched.” Some veteran boards do superb, sophisticated work that neophyte boards could not begin to accomplish, says Racht, while those that are entrenched do not.

Racht (pictured at right) ticks off a number of warning signs that might mean your board has sunk dangerously deep roots, many of which were present at 225 East 76th Street. Among them:

• Little or no turnover among board members
• Failure to hold annual meetings or board elections
• Lack of an audited financial statement or reserve fund
• Lack of communication
• Constant turnover of professionals, such as lawyers, accountants, and managers
• Preferential treatment of board members (i.e., freedom to sublet or combine apartments despite prohibitions in the bylaws)

“And if you haven’t had a maintenance increase in 15 years,” says Racht, “then something’s wrong because of the way operating costs have increased in that time. You’re probably not seeing that there’s an increasing deficit. The reality is that they’re probably not properly maintaining the building, and they’re passing the corporation’s obligations on to the shareholders.”

The repercussions of these warning signs can range from inconvenience to disaster. In buildings with high turnover among professionals, for example, history and records tend to get lost and the building gets such a bad reputation that it becomes harder to get good professional help. Few lawyers or accountants want to untangle a snake pit. A building’s reputation is usually known to brokers as well, and a bad reputation can lead wary brokers to steer potential buyers elsewhere.

Some residents of properties with entrenched boards find that, as a result of years of mismanagement, it becomes difficult for the building to borrow money. Others find that the resale price of their apartment is depressed. In extreme cases, they’re unable to sell at any price. Yes, even in today’s overheated market, there is such a thing as an undesirable New York apartment.

Most entrenched boards develop their own version of Newton’s First Law of Motion: once they’re in power, they tend to stay in power unless acted on by an external force. Boards can perpetuate themselves in a variety of ways, even in the face of forceful opposition from residents and fellow board members.

“What happens with a lot of these entrenched boards that don’t hold annual meetings,” says Racht, “is that when a board member gets fed up and quits, the person running the board simply appoints someone [as a replacement]. Or doesn’t. I know a building that wound up with two people on the board.”

In other words, it’s only through the application of external force – concerted, organized, and determined opposition from disgruntled shareholders or residents – that entrenched co-op or condo boards can get dislodged. It’s rarely an easy or pretty process. And like so many other things in New York real estate, it almost always costs money.

 

Building a War Chest

“The first thing you have to do,” says Racht, “is organize and contact like-minded shareholders. The main thing you’re going to need is a lawyer and possibly an engineer. The board is going to fight you, so you need a lawyer to make sure that whatever methods you’re using to get sympathetic people on the board are in keeping with the bylaws. You should create a treasure chest, collect money, and establish a bank account so you can pay professionals and any other costs, like printing costs for a newsletter.”

After organizing, members of the opposition must take on assorted tasks, such as reading the bylaws, the offering plan, and proprietary lease, and poring over financial statements and minutes of past board meetings, available to all shareholders. The sponsor’s voting rights should be examined as well.

The goal is to document, in black and white, a record of serious failures and bad decisions by the board. It is not to report sins of bad taste in a renovation, such as a hideous lobby or dreadful pea-soup-green hallway carpets. The evidence should then be presented to all shareholders, either at the regularly scheduled annual meeting or at a special session demanded by at least 25 percent of all shareholders. (The minimum requirement is just 10 percent if no meeting has been held in more than a year.)

“Your ultimate goal is to elect enough of your people to control the board,” Racht says. “But you have to have realistic expectations. Your first effort might fail, but don’t give up. I know of one board that needed four elections before they broke through. And getting even one seat can be an important start because it gives your faction access to all the corporation’s records. That’ll tell you where the bodies are buried.”

After the revolution, the new board needs to set priorities and, in most cases, should commission a “forensic accounting” to make sure that all financial records are in order. Do not assume that your professionals were in bed with the former board, Racht advises, adding that you should expect a maintenance increase the first year.

She closes with a caveat: “You have to park your ego at the door. This is not about you, it’s about making the co-op or condo a better place. Don’t make promises you can’t keep. And don’t make the same mistakes the entrenched board made.”

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