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Habitat Magazine Business of Management 2021

HABITAT

ARCHIVE ARTICLE

Admission Package

To some, the admissions process in a co-op is easy. The board reviews the applicant’s finances and if the money is in order, it’s a go. To others, the admissions is challenging. The finances may be okay, but how does the board know the residents will get along with the guy? Everyone has heard stories of litigious owners, about surprising charges of discrimination brought against well-meaning boards that then had to pay punitive damages out of pocket… What should be asked?

The approval process may be simple or it may be complex, depending on the board and its outlook, but one thing is certain: if you don’t think through your admissions policy, you can have problems. In this economically shaky environment, asking (or not asking) the right questions might eventually leave your co-op in a financial ditch, with deadbeats defaulting on mortgages and/or maintenance. And – as many boards have found, to their dismay – discrimination lawsuits can develop even out of the most innocuous comment.

So, what’s a board to? With that question in mind, Habitat’s Tom Soter sat down with Arthur Weinstein, an attorney and vice president of the Council of New York Cooperatives & Condominiums (CNYC) to discuss the application form he has devised for the CNYC (and which is constantly being revised to keep in line with changing laws). The interview follows.

 

What I’d like to do is go over with you, much as you did in your CNYC conference seminar, the more significant points of this application form.

The first thing to begin with is what you don’t want to transmit to your board. Not only are there tremendous privacy issues involved in this application, but there’s also risk to the co-op that there’s too much information for the co-op’s own safety.

What do you mean? You may have rejected them because of finance but they could argue…

An applicant could argue that you knew their age, race, handicapped status, or status in one of the other thirteen categories “protected” under city, state, and federal discrimination laws. Evidence that the board had such facts in the application may be used as the basis of a complaint that the co-op has discriminated against the applicant. But if the application itself doesn’t contain information that relates to areas of possible discrimination, you can rely on the application not being a possible source of evidence in a discrimination claim.

Also, I always recommend that there be a human body between the board of directors and the applicant. That is, there should be an initial review of the application by the building’s managing agent or attorney, who should do an initial review of the application for completeness or obvious gaps. That will avoid discussions between board members and the applicant, seller, their brokers, or attorneys in which, “prohibited” information may be provided to the directors. I strongly suggest that self-managed building use their attorneys as the physical body between the board and applicant.

If the application gives the board too much information any rejection can be challenged by the applicant going to any of the city, state, or federal human rights agencies and saying, “I’m a member of a protected class, that is, I’m gay, or black, or handicapped, or a non-citizen, or a single parent (or any of the other protected classes), and I allege that I was rejected because I’m a member of that class.” And once they show that board members knew that they were a member of that class, then these agencies almost automatically find what they call prima facie evidence of discrimination and then the co-op has to justify the rejection. Whereas, if the board hadn’t gotten that information it would be okay.

There is another fact that must be kept from the application package sent to the directors. The applicant’s social security number should never be distributed to board members or anyone other than those who absolutely must have it for credit and background review purposes. On the application, we place the credit report application in the very back of the package in a separate, removable section, with the warning: “Not for distribution to directors or any other parties.” In an age of frequent identity thefts, it is both unwise and, in some cases, illegal to distribute a social security number to someone who does not have a demonstrable need for it.

 

A Checklist:

Rules of the Game

You’ve got this checklist in the beginning. Why is that important?

Somebody has to review the application to make sure that everything you’ve asked for is complete and, as we’ve said, it should not be a member of the board. My office, for instance, has a letter of transmission that goes with this application that highlights all of the requirements of the application form. I believe each building should have a clear and concise checklist that applicants fill out. That helps them organize all the required information. The letter can also provide information about the co-op’s procedures and policies and offers proof for the board that the potential buyer has been advised of them, understands them and agrees to be bound by them. The form shows that the board has given the applicant an opportunity to look at the proprietary lease and the house rules, the co-op’s admission procedure, alteration polices, and any other rules that the co-op wants incoming shareholders to know.

This gives the board protection in case of future misunderstandings?

Yes, this is a protection page to have the buyer confirm that they have made them aware of some of the co-op’s rules, even including some basic rules such as prohibitions against subletting or refinancing without board approval and existence of “flip taxers.”

I assume it also helps if you have to sue them or they sue you?

That’s correct. And there have been cases decided on the basis that the buyer knew about the matter that they later decided to challenge before they bought the apartment.

 

Employment: Don’t Ask, Do Tell

What about this personal information? Can you ask about their job?

There are several difficult areas. For instance, the law says you cannot discriminate against a buyer because of his profession. And yet it’s virtually impossible to properly evaluate the applicant unless you know their profession. A glaring example is the professional trumpet player who will be practicing his profession in the apartment by rehearsing at all hours of the day and night. There are steps that we go into that can protect the co-op against somebody playing the trumpet at two o’clock in the morning.

What do you do?

Although you cannot reject someone because of their profession you are entitled to an assurance that they will not use the apartment in connection with their profession.

How do you do that without knowing what their profession is?

That’s the point. You can’t. So it is obvious that the board can and should determine the profession of an applicant.

You can argue that there’s a reason for asking besides discrimination?

That’s correct. If you reject the trumpet player, you have to have a record in front of you that you have rejected because they have not demonstrated that they will not practice their profession in the apartment. If you have somebody who’s a professional trumpet player for the New York Philharmonic, you’re allowed to say, “Is practicing the trumpet a professional requirement of your job?” If the answer is “yes,” then the next question is: “Do you have a place to practice other than this apartment?” If the answer to that is “no,” it is reasonable to assume that the applicant is going to use the apartment for commercial purposes. The proprietary lease usually provides that apartments may be used for residential purposes only if the board specifically consents to some ancillary use. Practicing a profession in the apartment is a proper ground for rejection.

But if you get someone like a writer…

I’ve never seen a board reject a writer, because the board usually gives specific permission to the profession of writing, after determining that the writer does not have a stream of people coming to the apartment for related purposes and will not have an adverse impact on the rest of the shareholders. So, it seems to me to be a totally rational decision to say, “We will consent to any writer practicing his profession, but we will not consent to somebody who’s a sculptor using metal that he bangs into shape in his apartment.” The distinction is, what will be the adverse effect on other shareholders caused by the practice of the specific profession?

I represented a building where there was a psychologist who practiced primal scream therapy. The patient would come to the apartment and be urged to scream as loud and exude as much of his pain as he possibly could. Obviously this drove the neighbors crazy. The co-op has a valid interest in excluding people who practice their professions if the practice is likely to interfere with the quiet enjoyment of other shareholders’ rights.

I suppose in the old days of typewriters a lot of writers might have fallen under that category if they worked late into the night.

I think you’re entitled to ask that question, “Do you use an Underwood? And if you use an Underwood, do you write in the middle of the night?”

Right, and you might also ask, “Do you know what an Underwood is?”

That’s right, that’s right. Only lawyers with no hair ask that question.

Why do you ask about the period of employment?

Because we want to know the steadiness of the applicant’s income. One of the difficulties with people in the arts is that their employment is so dependent on the ability to get jobs. So, the board is addressing that question: is this steady income? The board is not addressing the nature of the employment. You’re entitled to tell your managing agent to ask for prior employment history if the application shows a short period of employment. People are nervous of somebody just starting out and that’s relevant. The second page of our application form also has some potentially discriminatory topics.

 

Occupancy: Don’t Be Dense

You’re talking here about relationship of the occupants to each other, and, if they have any, the ages of any children living there. Where does the discrimination come in?

The New York City Multiple Dwelling Law contains a provision limiting the permissible density of people in an apartment. Therefore, the co-op is entitled to know that it will not be in violation of that law. For example, three adults living in a small studio apartment may violate the multiple dwelling law, which has definitions of the number of adults and children who may occupy an apartment based on the number of rooms and square feet of the apartment. So, the co-op is entitled to ask that question.

Most boards are not aware that they can turn to the multiple dwelling law for guidance as to how to say they don’t want their apartments overly occupied. We, of course, warn the boards that they’re not entitled to treat the marital status of the occupants, the sex of the adults, or the nature of the relationship differently than it treats married persons.

Interesting, I didn’t know that. Because we had a couple that lived together, and the son lived there, along with the son’s child and his sister. And this was a place that was only 500 square feet.

You go to the multiple dwelling law, and you work it out.

You have a section on pets, which we’ve already covered extensively in Habitat. All I’d like to say about that is that frequently the pets are better behaved than some residents.

I always start my CNYC classes with the question, “How many of you have failed to collect maintenance ultimately from every single shareholder at some point?” That is, how many people have lost maintenance because it wasn’t paid and you weren’t able to collect it? No hands come up. Then I ask, “How many of you have accepted a tenant who turned out to be a jerk or a real pain in the butt and you regret having approved them?” Seventy-five percent of the hands shoot up. My personal view is that board weigh too heavily on the finances and not heavily enough on the human being that they’re being asked to admit as a new neighbor. Most of the time it’s absolute nitpicking on the financials rather than trying it find out “who is this person we’re about to admit?”

Part of the reason for that, I guess, is fear of the discrimination laws. But that has skewed the process. The people who come in and sue because their upstairs neighbor flushes the toilet at 12:30 after the Tonight Show – or some other really trivial issue – are the co-op’s worst nightmare. Once a co-op has a complainer or a litigious person or somebody who is obnoxious, the co-op is stuck with them unless it is prepared to incur significant legal expenses.

That’s what you’re trying to deal with here?

Yes. I strongly recommend that members of the admission committee call each of the references and ask at least the following two questions: first, “Did you write a reference for Mr. or Mrs. X?” You’d be amazed that it’s not unheard of that somebody says, “No, I never wrote a reference.” And the second question should be: “Do you have anything to add to your letter?” Since people are often asked for a reference in a context that makes it impossible for them to refuse one can learn a lot from a flat statement “I have nothing to add to that letter. Good-bye.”

The person who’s asking for the application may have actually prepared the reference letter?

Exactly. Or asks somebody who is in some sort of a subordinate position to the applicant. Our form also asks if the applicant knows someone in the building.

Why is that important?

Because you’ll get an honest answer. The board should contact that person to know if they feel that this person is a proper neighbor. I am often asked if it is proper to call a mutual acquaintance of the applicant and board member and I always answer “Absolutely.” Again you are looking for an honest appraisal of the applicant.

 

Finances: Get an Estimate

That’s not to say finances are unimportant?

Of course not. In these economically troubled times, the financial status of an applicant is more important than ever. We’ve all heard of people who on a Thursday were worth $15 million and on Friday of the same week were worth nothing because they were investors with someone running a Ponzi scheme. The finances have to be looked at with care. It’s very hard to do the kind of full backup survey that an accountant would do on a certified financial statement. One thing that professionals should consistently emphasize is the value of non-liquid assets, such as paintings or wholly owned businesses. The co-op should obtain appraisals if a certain percentage of the assets are non-liquid.

Some co-ops use an application form that says if non-liquid assets or wholly owned businesses constitute 10 percent or more of the total assets of the applicant, they require backup documentation. I tell my clients, “If 10 percent or more of the buyer’s total assets are in non-liquid form or questionable investments – if a person owns the ABC Steam and Boiler Company and says it’s worth $2 million – the board should get an accountant’s statement of the net worth of the company.” Whenever the true value of something is not apparent on its face, the co-op is entitled to ask for backup.

 

Diplomats: You Can Just Say No

Why is diplomatic status important?

It is illegal to discriminate against somebody because he or she is not a citizen. People who are here with proper visas – work visas, student visas – are legal aliens who may not be discriminated against. The applicant may be asked about the lawfulness of their status in the United States but the questions must be asked carefully. For instance, the applicant should not be further asked the country of which he is a citizen. The applicant may be asked if he or she has diplomatic immunity. The reason? That’s the one case in which the co-op may never get its maintenance if the shareholder falls in arrears. Usually, people with diplomatic immunity can’t be sued in the United States. So, as a theoretical matter, if a shareholder with diplomatic immunity doesn’t pay his or her maintenance, the co-op may have an awful time evicting them or suing them for money damages.

 

Smoking: No Newbies

What about the question, “Do you smoke any tobacco?” Isn’t that a bit controversial?

Smoking is a controversial topic in New York right now. There are many buildings that are trying to deal with a recent court case that held that the presence in an apartment of secondhand smoke from another apartment could be deemed to be a denial of the warranty of habitability guaranteed to all rental tenants, including co-op owners. Several co-ops have tried to ban smoking within apartments and they’ve all been essentially unsuccessful. But I represent two buildings that ask the question on their application “Do you smoke any tobacco products?” And they will not accept any person who smokes into the building. Is smoking a handicap or an addiction? I have advised these clients that the co-op is making an accommodation for people now in the building who have asthma or other lung-related illnesses. This policy has been vigorously enforced by these buildings. I do not think they are discriminating against a smoker because he or she is “handicapped.”

 

Bankruptcy:
Frozen Out

What about this question about whether they have filed for bankruptcy?

Bankruptcy is one of the areas of concern for a co-op because bankruptcy can tie up getting the money for years since there’s a freeze placed on creditors of a bankrupt person. The co-op could be waiting for years to get its money and it is a question of relevancy to see, has this person used bankruptcy proceedings in the past? Are they a potential bankruptcy abuser?

They can be bankrupt and stay in the apartment while they…

Exactly, while they work out the bankruptcy, while the process goes forward, they may remain in the apartment. And the co-op may incur significant legal expenses that it may not get reimbursed for. So a history of bankruptcies is relevant.

All these things we’ve been talking about are just suggestions, of course.

Of course. Each building’s package should be shaped by the needs of that building. There has been a move in the City Council to standardize applications, with all kinds of dumb legislation being introduced. Such legislation makes no sense. A co-op building should be entitled to put its particular issues of importance into its application form. There are buildings that don’t care a bit about smoking, there are buildings that don’t care about pets, so let the boards focus on the areas of particular concern to them. If they discriminate, there are powerful laws in place and agencies in place to vigorously enforce those laws. But, short of real discrimination, buildings should be entitled to ask the questions that are important to the shareholders and to their view of what co-op living is about.

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