New York's Cooperative and Condominium Community

Habitat Magazine Business of Management 2021

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ARCHIVE ARTICLE

Nail and Mail

It’s not an urban myth. New York City building inspectors really are issuing more violations. Multifamily dwellings – cooperatives, condominiums and rentals – received 71,345 violations in 2019 – a jump of almost 6 percent from the year before.

The implications of this uptick go beyond the aggravation and expense of fixing the violations and paying – or fighting – any penalties. According to a cross-section of property managers, attorneys, mortgage brokers, insurance carriers and others interviewed for this article, lenders and insurers may be looking more closely than ever at Department of Buildings (DOB) violations, then factoring them into decisions whether to issue a loan or a policy, and under what terms.

"I am hearing that there has been more attention put toward them, and there are a few reasons why," says Bradley Green, a partner at the law firm Cohen, Hochman & Allen. One may be that a DOB systems update is making fines and penalties more visible on the department’s online Building Information System (BIS) and DOB Now. "The DOB records are showing the base penalties for violations," Green says, “even if [the violations] are certified as corrected, even if the matter has been adjourned or a decision is pending."

By way of example, Green says one of his client co-ops that was trying to refinance its mortgage had violations largely certified as corrected. “But the bank was still saying that money was owed,” he says. “They normally wouldn't have seen that.”

There’s a consensus that because there are new regulations each year, an increasing number of things can be cited as a violation, and therefore there can be more things to catch the eye of lenders and insurers. Green believes it's now more likely for fines and penalties to show up on their radar.

“Lenders all have some barometer of how they take violations into consideration," says Nicoletta Pagnotta, senior vice president of the commercial-mortgage broker Meridian Capital Group, which works with some two dozen lending institutions. "Each [lender] has slightly different parameters as to how they take the violations into consideration. But they definitely – I would say unanimously – all look at them."

As for insurers, Steven Potolsky, managing director of the Long Island-based North Shore Risk Management brokerage, says that how much attention they pay "really depends on the nature and the class of the violation,” There are three categories of violations: “immediately hazardous,” “major” and “lesser,” he notes, and some carriers pay more attention to them than others,

Thomas Thibodeaux, chief financial officer of New Bedford Management, says: “The insurance companies are looking at the violations. If you have violations for peeling paint that could turn into a lead-paint lawsuit, they're going to walk away from that building. Such physical-maintenance issues are a potential liability for an insurance carrier." (see related story on page ??)

Underwriters confirm that they’re taking a close look at violations, with excess-liability carriers giving them especially close scrutiny. It’s not just the number of violations, carriers say, but their nature. Severe violations, such as faulty balconies, can make it more difficult get insurance because they’re more likely to lead to claims.

 

Get Ready to Do Some Digging

The solution might seem simple – fix the violations – but that's not always easy to do. Some fixes require lengthy board debate as to the best method, and then bids have to be sought and financing obtained. Sometimes a board or a manager may not even know there's a violation, since the summons may have been improperly served – or even sent to the wrong building. Other times, a violation may have been corrected but the city record wasn't updated. So there are a number of reasons why violations could remain open.

Buildings with rent-regulated sponsor units are particularly vulnerable, Thibodeaux says, since tenants are more likely than co-op shareholders or condo unit-owners to call the city's Department of Housing Preservation and Development (HPD) to complain about violations. “We’re seeing now that banks ] are paying more attention to these violations, to the point where it's causing problems as far as closing on a refinancing of an underlying mortgage," Thibodeaux says.

How is a board made aware that a violation exists? Through a process colloquially known as “nail and mail.” A DOB spokeswoman explains: “For something like an elevator issue, for example, an inspector would post the notice of violation on the door” of the elevator. That’s the nail part. “But they would also serve the violation to the responsible party,” usually the building’s management company. This is done in one of three ways: by mail; by handing the violation to someone in the building such as the super; or by using a process-server. It’s then up to the “responsible party” to notify the board.

Most management companies use violation-tracking software from companies like Alert Service, DOB Alerts and SiteCompli. Once the board is aware of a violation, it needs to do some digging. Is the violation directed to the building or to an individual apartment? "Usually there is a story if there are a lot of violations," says Pagnotta of the Meridian Capital Group. "Is it a unit that has a ton of violations but the tenant refuses access? Or is the violation outdated, and all the work has been done, and it simply needs to be removed from the record? Depending on what the story is, we can potentially get around some violations."

Green, the attorney, adds: “Sometimes I have to step in and talk to the bank directly because there may be open violations that are not issued to the building but happened to be issued at the building – meaning there are contractors or third parties that were doing work in the building, and they were issued violations."

For example, he says, the single biggest current area of violations is residents who illegally rent rooms to transients via Airbnb and other platforms. "If it's a condo, the unit-owner will get issued the violation directly related to the occupancy,” Green says. But the condominium as a whole is issued companion violations for treating the building like a hotel without hotel-code egress, fire alarms and sprinkler systems.

Building owners aren't legally obligated to pay judgments for violations issued against such third parties as illegal subletters. "But banks," Green says, "sometimes come in and say, 'I don't care, I want you to clean house,’ " meaning pay all the fines, regardless of who they were issued to. "The board may not have any choice but to pay what's owed," he adds, but there is a recourse. "I have buildings that will pay the judgments and then engage in litigation or other legal means to collect from those third parties."

 

Borrowing Under a Cloud

Thibodeaux of New Bedford Management, says one way for boards with outstanding violations to get loans approved is through escrow arrangements. Some lenders will agree to make a loan provided that part of the sum is set aside to pay for correcting violations. "We have a co-op in the Bronx that closed on a $3 million refinance,” he says. “The bank has kept $50,000 in escrow until violations are cleared. It's not too bad. It's better than not being able to close on a loan. Initially, they weren't going to let us close at all, so that was the compromise between the bank and the attorney."

Similarly, says David Lipson, mortgage director at Century Management, one of his client buildings that was seeking a loan had suffered a heating-oil spill requiring expensive and time-consuming remediation. When a potential lender discovered this, it backed out of the deal. Lipson subsequently approached half a dozen other lenders, eventually settling on the National Cooperative Bank (NCB), which put $150,000 of a $20 million loan into escrow to deal with the oil spill. Typically, Lipson says, the building pays for the remediation up front, then gets reimbursed once it provides documentation to both the city and the lender.

 

Clearing the Books

Once a violation is corrected, it needs to be removed from the city’s database, a straightforward process. The building’s representative submits a Certificate of Correction to the DOB with a notarized statement attesting how the violation was corrected, a DOB invoice showing that all related penalties have been paid, and any supporting documentation. Violations remain open until the DOB approves the Certificate of Correction. If a board feels violations are unfair or invalid, it can challenge them before the Office of Administrative Trials and Hearing, formerly the Environmental Control Board.

"It takes about three days, sometimes more, to clear it off their site once everything's submitted," Thibodeaux says of the Certificate of Correction. In the meantime, he notes, lenders and insurers will usually accept documentation showing that corrections have been completed or are under way.

Here are some steps boards should take. Be sure you're made aware of violations quickly. Correct the more easily handled violations immediately. Make plans to address larger problems, so that even if you can't afford to fix them right away, you can at least assure lenders and insurers that you're on top of things and have a strategy in place. Clamp down on illegal sublets and unsafe contractors.

"I have clients who have hired private investigators who comb the internet to see if there are illegal listings for units in their buildings for short-term use," Green says. "I have more cameras being set up in common areas. I have doormen who are trained to see and keep track of who's coming and going. Supers and maintenance workers are doing more.” And boards and building managers are cracking down on residents who are doing work within their apartments without the proper permits and without giving proper notice to the board.

Thibodeaux adds: “Ask your management company for a list of any open violations. Develop a game plan to cure them. If it's something that's sponsor-related, see what communication channels are in place for dealing with the sponsor.” The goal is simple: “Clear the violations.”

Then get ready for the next wave.

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