Problems at your property? Don’t just blame the manager: maybe the board is ignoring the red flags.
The board members of the small Manhattan co-op were stunned by the news. The accountant told them that the managing agent hadn’t paid the corporation’s quarterly employee payroll taxes for the whole year. As a result, the co-op owed over $4,000 in back taxes and at least $2,000 in penalties.
Another board had other concerns: it needed to have asbestos removed from its mid-sized Brooklyn building. The managing agent found two contractors to bid on the work. Once the bids came in, however, it was hard to judge who was the better choice: each company offered different services at different prices. “It was apples to oranges,” says the treasurer. When she called to check their references, however, she found that both were losers: between them, they had incurred dozens of city and state work violations.
Then there was the mid-sized Manhattan co-op that went to refinance its mortgage. Self-managed, it had seemed relatively problem-free. At least it did if you kept your head in the sand, the way this board apparently did. When the lender performed due diligence, it found dozens of unpaid bills and thousands of dollars in late fees in different areas. The treasurer admitted he had known about it, but had neglected to share it with the other directors.
A board hires a professional – be it manager, attorney, or accountant – to do what a professional does: manage the property, interpret the law, or balance the books. It appoints a treasurer to do what a treasurer does: handle the money. And then its members are surprised when things don’t get done. But what are board members doing while these accidents are happening? Playing golf?
In your private life, a bank sends you a monthly statement; you will then, presumably, square that account with your own checkbook reckoning. You may trust the bank, but it makes sense to double-check their figures. It is the same with a board at a co-op or condo. It’s called oversight, or as Ronald Reagan famously put it: “Trust but verify.”
Yet doing that can be time-consuming, especially for a board made up of amateurs – volunteers who are not full-time real estate experts. The answer is to watch out for warning signs – the red flags, if you will – that say, “Pay attention, there are potential problems ahead.”
The biggest red flag is also the one that trips up more unwary boards: the payment (or lack thereof) of the monthly bills. If these are not being paid on time that could indicate back office sloppiness, seat-of-the-pants management, or, in the worst-case scenario, criminal activity.
Take the Manhattan building that neglected to pay its payroll taxes. When the board confronted the manager, he essentially said, “Nobody told me to.” More specifically, he blamed the accountant for not reminding him. In the past, he said, “We merely issued the paycheck.”
His nonchalant response spurred the board to review its records. The directors found a carelessness they had never suspected: the manager had missed routine payments to the insurance carrier, been late in paying quarterly real estate taxes on the building, paid the superintendent’s salary erratically (missing one month and then paying him double the next month), and paid an invoice for another building’s job with the co-op’s funds.
The board members were careless in another way: they had not supervised the agent properly. They offered a number of excuses: the agent had won awards and was knowledgeable, charming, and informative. Nonetheless, the treasurer – at the very least – should have noticed. The manager had been giving him all the bank statements, invoices, and copies of the cancelled checks. “If the treasurer had been reviewing the monthly management statements, he should have noticed that there was no disbursement for payroll taxes,” observes Mindy Eisenberg Stark, a forensic accountant.
If the board/treasurer had not gotten bank statements, invoices, and checks, then that would have been a red flag. “You don’t know jack unless you get all the bank statements with your monthly management financial report,” warns Neil Davidowitz, president of Orsid Realty. “Otherwise, the report is worth toilet paper.”
Hiring contractors and doing repair work is simple – in theory at least. Get three bids, check out the references, and choose one. If your manager says three bids are unnecessary because he knows someone who is quite good, watch out: that should be a red flag. For instance, there was the Manhattan co-op that had a serious rat infestation problem. The manager brought in an exterminator, but the board neglected to ask for prices or to bid it competitively. After $5,000 in extermination fees had blown a hole in the budget, the board woke up.
“You should always get multiple bids for a job that expensive,” says attorney James Samson, a partner at Samson Fink & Dubow. “You should also be sure that at least two of the bids are not people suggested by the manager. Then someone has to confirm the number of visits being made and that the contractor is doing what he says he’s doing.”
Beware, too, of managers who “take the initiative” on big purchases using your money. Samson recalls a managing agent who went ahead and replaced a boiler because, he claimed, “it was an emergency.” The board was furious, arguing that some experts had said there were alternatives to replacing it. The agent had already paid for it, however. He was fired and the board did what it should have done from the start: limiting the amount a manager can spend without board approval.
“You can also have a clause in the contract that all repairs need to be approved by the board,” says attorney Theresa Racht, a partner at Racht & Taffae, “and that any fees incurred without approval will be paid for by the manager.”
Emergency work, naturally, cannot go through the bidding process. “You can’t bid a pipe break in the wall or an emergency elevator breakdown,” says Orsid’s Davidowitz. “To protect yourself, you want to know in advance what the hourly rate is on the mechanic and his helper. And you need to have a log in the building to keep track of their hours.”
Be wary of being “yessed to death,” as one Brooklyn co-op treasurer puts it. “They’d say, ‘Yes, we’re taking care of it, and, then, at the next meeting, you’d go back and say, ‘Where’s the memo we drafted?’ It would be forgotten. If they keep saying, ‘Yes, we’re on it,’ and there’s no follow-through, I’d be worried.”
She knows from experience: when one of the co-op’s residents was planning to combine two apartments, she asked the manager to get her the paperwork and clear up any legal matters. Even though this is generally not the agent’s responsibility – it is the shareholder’s – he agreed. But after the construction work was complete, it turned out that the manager had not notified the Department of Buildings or gotten the correct permits. The woman received an enormous fine. And the board, which should have known – or at least been told – that this was not the agent’s job, ended up with egg on its face.
To be fair, most boards don’t have the time to be involved in everything – otherwise they wouldn’t need to hire outside professionals. But boards can’t put their heads in the sand and hope that problems go away – they must be savvy, or they’ll go down. Among the steps they should take:
Check and double-check. At the monthly meeting, the manager will report on the status of the accounts payable and receivable. The entire board, or, at the very least, the treasurer, should check these figures against the actual invoices received. That’s how one building found out its money had erroneously gone to pay the expenses for a job at another property.
Have a certified audit – and maybe some smaller outside audits in between. Every building should have an accountant-certified audit in which everything is checked against the original paperwork. A less expensive “compilation audit” simply adds up the numbers the manager presents without any investigation. If you’re worried about your accounts, says Arthur Weinstein, an attorney in private practice, you can also have quarterly audits performed. “It’s not as thorough,” he notes, “but it can bring up irregularities.”
Know your documents and deadlines. If your treasurer is on the ball – i.e., he is familiar with all the pertinent financial documents and deadlines – your board won’t have to rely on the kindness of managers. If the treasurer/board is aware that taxes are due every quarter, for instance, budget shortfalls will be noticed instantly.
“It’s a red flag when you have a very predictable expense like the real estate tax and you’re told you don’t have the money to pay it,” says Samson, referring to a building that faced just that problem. “People will use an excuse that if they say it real fast sounds good but, when you investigate it, smells. They say in December they don’t have enough to pay the real estate taxes? Well, they could have known in September if they had been on the ball.”
Educate yourself. Be involved enough to know what you don’t know – and know what questions to ask. The Brooklyn co-op with the asbestos problem was shocked to find that the two proposed contractors had a ton of violations. Following the dictum, “We won’t be fooled again,” the directors subsequently hired an engineer to give them a crash course in asbestos removal so they would know the right questions to ask when the hiring process began again.
Prepare a (preferably monthly) spreadsheet of projected and actual expenses. As a way of navigating through all this, the treasurer should prepare a monthly, quarterly, or annual spreadsheet of the budget, with projected and actual expenses laid out clearly side by side. It is then easy to see the overall state of your finances not to mention when a bill has or has not been paid.
Be sure your treasurer is obsessively anal. Most attorneys and conscientious managers agree that the treasurer’s role is vital. “You want the biggest pain in the ass to be the treasurer,” argues Samson. “You want him to be compulsive and ask a lot of questions. In that case, when there’s an embezzlement or a scheme, they’ll steal from someone else who’s not looking as closely.” Agrees Weinstein: “The treasurer is the key player. He should be the primary watchdog.”
In the end, however, the buck doesn’t stop with the treasurer. It stops with the board. “You want to have a healthy skepticism,” argues Samson. It is, after all, your home, your money – and ultimately your responsibility. If the boat sinks, you can always blame the manager. But you’re the one who will drown.
Amber Lights Top 20 Warning Signs
Attorney Stuart Saft, a partner at Dewey & LeBoeuf, offers this list of 20 red flags. “These are warning signs,” he explains. “They just mean you have to check to see if there is something really wrong. It is the amber light telling the board to slow down and look around.”
1. Need for surprise assessments
2. Taking money for building operations out of the reserve fund
3. Complaints by multiple residents about building conditions
4. Repeated leaks
5. Repeated grievance proceedings filed by the staff
6. Hostile shareholder/unit-owner meetings
7. Apartments selling below market
8. Frequent apartment turnover
9. Inability to sell apartments
10. Multiple lawsuits
11. Numerous and frequent building code violations
12. Bills not being paid on time
13. Late charges and penalties
14. Sudden appearance of old unpaid bills
15. Managing agent wants a premium for managing the building
16. Need to frequently change managing agent
17. Substantial maintenance increases
18. Accountant quits
19. Accountant can’t issue financial statements
20. A picture of the building appears in the New York Post