If you see dead people, try to get them to pay. It’s a fruitless task. “Dead men tell no tales,” goes the pirate mantra, and, as boards have discovered, they don’t pay bills, either. That could be a problem, especially if the case goes to probate court.
This particular difficulty starts when residents die, leaving no direct heirs. Cooperative and condominium boards find they are no longer dealing with a neighbor but with a byzantine judicial system. The estates have been passed on to the courts and the judges who run them. This can tie up money needed to pay maintenance and usage fees, which could end up – as the months it takes to settle the estate drag on – placing previously solvent units in arrears. »
Why should that make you worry? Simply put, a high percentage of arrears, like a high number of sublets, can affect your building’s ability to refinance its mortgage – and can affect sales because your potential buyers may have difficulty getting financing.
From Beyond the Grave
Veteran New York mortgage broker Pat Niland, president of First Funding, says that he’s seen no fewer than three buildings that were affected by probate issues just within the last year. Niland notes that there is a distinct difference between how arrears are treated by banks. Following the disposition of an estate, co-op buildings are first in line to collect. But with condos, the bank has first dibs; its mortgage takes precedence for repayment over all others. Thus, deceased residents can be an even greater concern for condo buildings.
A case Niland recently dealt with involved a co-op in Brooklyn with just under 300 units and a resident roll that included more than a few seniors. Between 10 and 12 units in the building were in probate. This drove up the percentage of the building’s units in arrears.
“New York probate is time-consuming, and, in general, banks don’t like it when more than five percent of your units are in arrears,” he explains. Indeed, New York has one of the most notorious probate courts in the world. There are some who will tell you that it’s worse than the byzantine system Charles Dickens described in Bleak House. That alarms banks. The problem can be a particular issue for buildings with a high proportion of elderly tenants. “And they get very uncomfortable when you get above 10 percent,” Niland says.
Are all banks deaf to such arguments? No, says Mindy Goldstein, a senior vice president at National Cooperative Bank who specializes in lending. “We look at everything – the overall picture. We can underwrite around a situation [with high levels of arrears caused by probate].” But, she adds: “The co-op’s attorney and its board have to be proactive and stay on top of it. They have to make the proper notices to lenders. And they have to have a detailed plan to deal with the protocols. They should even possibly create an escrow account until arrears go below a certain percentage.”
Wiping Out the Debt
Those notices to banks necessitate a savvy accountant. That professional can come to your rescue in a number of ways. One is to make a special disclosure. What that means, says Stephen Beer, managing partner of the accounting firm of Czarnowski and Beer, is that the board must submit an “advisory note” explaining the reason for the high rate of arrears.
The problem with this is that “the banks may not pay attention to your note,” Beer observes. A more sophisticated technique is simply to write off the deceased residents’ debts. Why do that? It’s a question of math. Doing so takes the arrears off the list of units that are behind in paying their charges, improving the ratio of paid to unpaid units. (Beer observes that he does not know of any accountants who would employ the second technique unless a client requested it. But, he says, many banks will fail to notice the shift.)
The maneuver implies that these debts are not expected to be repaid, even though they almost certainly will be if the units are in a standard co-op building. That’s because a co-op has the first lien (i.e., is first in line) to collect when the estate is settled. If and when the apartment is sold, one of the conditions of sale is that the arrears be paid.
Condos are a different story, though: the bank has first lien on the units here. Consequently, after the bank has recouped outstanding bills, the building may come away with nothing.
Small Size, Big Problem
Beer reports that probate can be a particular problem for Mitchell-Lama cooperatives. Beer says those subsidized co-ops may get into a bigger financial hole than that caused simply by arrears. “Often these apartments need a lot of repair work before they can be sold,” Beer explains. “You have costs getting the unit ready for the next person. The apartment may have $20,000 in equity, and you have to spend $30,000 to make the apartment [presentable] because it hasn’t been taken care of for so many years. That’s a potential loss.” Moreover, no lender is going to be standing ready to clear the arrears off the books to keep the late owner’s mortgage on the unit from going into default.
The size of the building is likely to be relevant to its capacity to cope with delinquencies as well. Jay Silverberg, general manager for the 2,702-unit Lindsay Park Housing Corp., a Mitchell-Lama co-op in Brooklyn, says that the most serious problems his complex has faced have only arisen when a unit-owner died without a will or a close relative.
“Arrears can quickly exceed the equity in a Mitchell-Lama unit,” he acknowledges. “But even if the unit-owner dies without a will, the building will typically get the unit back fairly quickly if there’s a close relation who can step forward. If you have neither, then the matter has to be resolved by a public administrator, which can take time.” He adds, however, that “we’ve only had a few such cases in the 20 years I’ve been here.”
Richard Montanye, managing partner of the accounting firm of Marin and Montanye, which has an extensive Mitchell-Lama client list, points out another pitfall: write-offs related to arrears in Mitchell-Lama buildings must be approved by a New York City or New York State official. “And you can’t really transfer the unit until the estate is settled,” he says. At the same time, Montanye emphasizes that in his experience it is “unusual” for such problems to deter financing.
But just as death is inevitable, the complications arising from it may be equally unavoidable. Thus, it may be good for co-op and condo boards to bear in mind the Scout Motto: be prepared. (And don’t talk to any dead people.) n
The board was up in arms. The lawyer who was representing the small Manhattan building in some long-running litigation against a commercial tenant was “not doing his job,” said an impassioned board member, who then used a colorful epithet to describe the attorney and his work.
The president of the board, who had known the lawyer for years, didn’t agree, and he said as much. That led to more heated talk, always fun at a board meeting. The president later acknowledged that this board had difficulty with both attorneys and managing agents. “They must find us demanding,” he says, pointing to an incident in which a board member, in a phone conversation, actually brought a lawyer’s secretary to tears by his relentless manner with her (for his part, the cross-examining board member insists that he was simply trying to get a straight answer out of the woman).
This particular co-op has employed four attorneys in the last 16 years, so, by my count, that averages out to about a new attorney every four years. It’s doing a little better with managing agents – two in 16 years – but that’s only because the board got so fed up with the caliber of the agents that the members decided to do it themselves.
Is such turnover that unusual? Not really. The relationship between a board and its professionals always starts off with a good head of steam and the sort of hopeful visions of the future that presumably exist at the start of any marriage. But then, invariably, communication breaks down, and the blame game starts.
This building’s first manager came out of the sponsor’s office and initially seemed efficient. But when she started saying things like, “I haven’t gotten to that item” and “If you’re so concerned about it, you can call the contractor yourself,” you didn’t have to be a genius to recognize that it was time for her to go.
And when the second manager didn’t pay key taxes for the co-op – and then blamed the board for not being on top of him – it was time for him to go as well.
As for lawyers, well, they can certainly be equally frustrating. They speak in legalese; they like to commence matters rather than begin things, they talk about fact patterns rather than facts. And, of course, they charge by the hour (and most of them invariably like to talk).
Those may seem like small things, but from tiny acorns...well, you know the rest.
For my part, I’ve always felt that when you’re working with a professional, you should try to trust him. After all, he’s the pro and you’re the talented amateur. (Trust can be spread thin, however, when you call your attorney to question an item on the bill for “services rendered,” and you then find on your next bill that you have been charged for your phone call questioning your last bill. You could go on like that for quite some time, although at $400 an hour, I’d think you’d move on to a better billing system.)
But those are problems that go with any relationship, and I feel that cursing out your lawyer, while livening up the conversation and helping you to vent, does nothing to advance the partnership. The best question to ask is: “Are we getting what we paid for?”
In the story told earlier, the building’s lawyer was being questioned by angry board members because the litigation was taking longer than anticipated, which is sort of silly. After all, isn’t that the definition of litigation and also why most sensible people avoid it?
Bottom line, you may want your lawyer to talk less and do more, but if he warns you at the outset that your case is no slam dunk, that litigation is expensive, and that the “fact patterns” might be against you and then, some months later gets you the result you want (and also gets the insurance company to pay all his fees), well, then I think you’ve got only one thing left to say to him: “Thank you very much.”