When problems concerning a building’s structural integrity suddenly crop up, no co-op or condo board relishes relaying the bad news to shareholders or unit-owners. But unpleasant surprises are inevitable, and boards need to know how — and how much — to disclose.
The board at London Terrace Towers was in for a shock. Based on an engineering report, it anticipated spending $3 million on routine facade repairs at the 700-unit, four-building complex, which opened in Chelsea in 1930. But when the property manager pointed out that the co-op’s ornate terra cotta hadn’t been factored into the equation — and a subsequent survey revealed that the concrete slabs on the terraces were also compromised — the price tag ballooned to a staggering $15 million.
The co-op’s problems are hardly unique. Routine facade work on older New York City buildings frequently reveals conditions that are a big, and unwelcome, surprise — leaving boards not only with the daunting task of figuring out how to finance repairs but also the best way to break the bad news to shareholders or unit-owners.
At London Terrace, it was co-op policy to hold town-hall meetings between annual shareholder meetings. But before scheduling a town hall to disclose the surprises on the terraces and the terra cotta, the seven-member board had to do its homework. “The first thing we did was to talk to our professionals and get all the details right and come up with a plan,” says Matthew Klein, the board’s president. “I’m adamant about being prepared so you can anticipate people’s questions and offer a clear way forward.”
The board, along with Brendan Keany, the co-op’s general manager, did just that at a town-hall gathering last August. They brought in the project’s engineer, Howard Zimmerman, the principal at Howard L. Zimmerman Architects & Engineers, who showed photographs and gave a PowerPoint presentation explaining the scope and timetable for the extensive repairs, which won’t be completed until 2023. The meeting was also videotaped and uploaded to BuildingLink for shareholders who couldn’t attend.
Though a deal had yet to be nailed down, the board outlined its plan to refinance the co-op’s underlying amortizing mortgage with an interest-only loan. After it succeeded in securing an $80 million mortgage with a 2.3% interest rate, which will allow it to pull out $25 million for capital repairs and replenish the reserve fund without raising maintenance or imposing an assessment, the board sent out a letter to shareholders to spread the good news. “It all turned out really positive,” Klein says, “but going into that town-hall meeting we could have gotten destroyed. That didn’t happen, because people understood this wasn’t something we had let get out of control and that we weren’t spending money willy-nilly.”
Indeed, when boards run into unexpected structural problems, it’s essential that directors make it clear they’re doing everything possible to rein in costs, Zimmerman says. While repairing brickwork at a 1960s co-op in Greenwich Village, he discovered rotting and missing wall ties inside the cavity wall, which could be replaced only by reskinning the 18-story building. “Suddenly we went from a $2 million project into a $10 million one,” he says. At Zimmerman’s urging, the original contractor agreed to shave the price by $500,000. But the co-op ended up saving twice that much by rebidding the job, switching to a new contractor and limiting the work to reskinning the front of the building while installing the missing wall ties on the facades not facing the street.
The board laid out its strategy to shareholders at a town-hall meeting, where Zimmerman also put the repairs in broader context. At the London Terrace presentation, he had discussed the Department of Buildings (DOB) requirement to replace — not just caulk or patch — damaged terra cotta, and the board’s decision to use pre-cast stone, which is lighter, cheaper and more durable. This time, he explained the DOB’s new requirements to inspect wall ties under the city’s mandatory Facade Inspection and Safety Program (formerly known as Local Law 11).
“Doing those probes has opened up a whole new can of worms and a new level of structural repairs for a lot of 1950s and 1960s cavity-wall buildings,” he says. “But the board presented its case well and made things as palatable as possible. Not everybody was happy, but they were less unhappy than if they had to spend the money that a total reskin would have cost.”
Bad news about a building’s integrity isn’t confined to older properties, of course. When structural or systemic issues are uncovered at newly constructed buildings — an all-too-common occurrence — boards need to bear in mind that disclosure has its drawbacks. They range from sowing owner panic to hurting property values to weakening the board’s leverage against the sponsor to correct the problems.
Julie Schechter, a partner at the law firm Armstrong Teasdale, had to point out these risks to the board at a newly constructed condo in Brooklyn, where unit-owners were up in arms over a host of problems plaguing the building. There were leaks, elevator issues, insufficient insulation and inadequate fire stopping. After an initial engineering report revealed structural defects, the board wanted to release the report to unit-owners, but Schechter cautioned against it.
“If you’re not an expert,” she says, “the language in these engineering reports can sometimes be alarming, and they’re drafted in a way that makes it sound like the walls are caving in.” She adds that it’s sometimes in unit-owners’ best interest not to know the details, because divulging them can cause widespread panic. “Owners are always seeking as much information as possible, but distributing an engineering report is just too much information,” Schechter says. “And it can be misinterpreted.”
Mark Hankin, a partner at the law firm Hankin & Mazel, also advises clients against sharing too much information. Boards are legally obligated to maintain their buildings and to keep a record of their decisions in the minutes of their board meetings, but the buck stops there. “Once you’ve decided to do repairs, I believe you should disclose that as soon as possible,” he says. “But I do not recommend releasing the entire engineering report, just a synopsis and the recommendations.”
There’s another reason for keeping the details private. If you’re trying to get the sponsor to take responsibility for defects and pay for repairs, the last thing you want is for the sponsor to get hold of the report, which can undermine your case. “Whether you’re trying to negotiate a settlement or are considering a lawsuit with the sponsor, making the report public can backfire,” says Schechter, who did end up in litigation with the sponsor at the Brooklyn condo. “You want to control what the other side sees and not tip your hand.”
The condo followed her advice. At a meeting with unit-owners, the board spoke about the engineering report results, but only in generalizations. And the board told the unit-owners that it did not want to release the report, saying a leak could hurt property values. “The board also made it clear there was no imminent danger and that it would be providing updates, which really placated people,” Schechter says.
Even in cases where boards suspect safety defects, it’s wise to resist the rush to disclose, says Leni Morrison Cummins, a member of the law firm Cozen O’Connor. One of her clients, a new 59-unit, 14-story condo in Chelsea, was looking into a buildingwide plumbing problem that was causing leaks from one unit to the next when it discovered inadequate fire-stopping behind the walls in some apartments. While there was a potential risk that a fire in one unit could spread, the extent of the problem was unclear. Unless a defect presents an imminent danger, says Cummins, a board’s best course of action is to wait until an investigation confirms there’s an issue and the defect is remediated, since premature disclosure can hurt a building financially. “Once anything leaks out, the rumor mill gets going, brokers will get word and so will potential buyers, and property values take a hit,” Cummins says.
Still, the Chelsea condo board insisted on full disclosure at the annual meeting. “Their rationale was that there was no reason to hide it, because if there was a problem and we pursued a construction-defects suit against the sponsor, it would become public anyway,” Cummins explains. And while the board members didn’t specifically mention the condo collapse in Surfside, Fla., they were very concerned about liability. “However, disclosure isn’t a magic bullet,” Cummins warns. “Regardless of what a board tells the owners, the best way it can protect itself is to take action to remedy the defect and record that in the minutes.”
With the fire-stopping study yet to be completed, the final verdict is still out. “It’s understandable why some boards want to err on the side of disclosure, but they also have to protect the best interests of the building,” Cummins says. “It’s a balance, and there’s no perfect line.”