This in an anxious time in which to sit on the board of directors. With defaults and foreclosures accounting for some 20 percent or more of the units at some condominiums, frustration among board and association members is off the charts.
“The economy is driving people to feel upset generally,” observes attorney Dennis H. Greenstein, a partner in the law firm of Seyfarth Shaw LLP in New York City. Plus, “oil was very expensive last year and real estate taxes are flying through the roof. And when you put capital repairs and improvements to the building on top of that, we’re getting increases in maintenance charges, common charges and assessments.”
“I think that’s why transparency has become such a big issue,” says David Hartwell of Penland & Hartwell, LLC, a real estate law firm based in Chicago, where owners face the same financial challenges. “When everything’s good, nobody seems to care, but when things go bad, suddenly, they ask, ‘why aren’t they telling us what’s going on? How do you make these decisions? Who’s running the joint?’ ”
While it is next to impossible for those running the joint to completely forestall accusations of lack of transparency, board members and management can make the bitter pill of cost increases easier to swallow by paying scrupulous attention to the way they communicate with owners.
“In this modern age, there seems to be a push for as much transparency as one can get. The question becomes at what stage is there transparency?” asks attorney Steven M. Goldman, a partner in the Real Estate Department of the White Plains-based law firm of Kurzman Eisenberg Corbin & Lever, LLP. “In other words, when you're first vetting out contracts, should they be open to review and discussion by everyone? It is in the best interest of the co-op or condominium to have that sort of discussion,” Goldman says.
The Letter of the Law
For starters, members need to adhere to the letter of the laws prescribing the records boards must keep and the rules on their disclosure. The laws governing cooperatives in New York are similar to those for condominiums, but, co-op board members should know that their operations are dictated not by a governmental housing authority but by the rules that cover any corporation in New York State, the Business Corporation Law (BCL). For condos, their governance is set forth in the state’s Condominium Act. The New York Condo Act is to condominiums what the BCL is to co-ops: a set of rules by which the boards and developers must abide in order to run their buildings fairly and legally.
There are times when open communication is advisable, Goldman says. “I think here are two separate issues—the fact that you are doing a project, undertaking a project, should not be hidden. The possible cost implications of a project should not be hidden but the actual negotiations of vendor contracts, the whole bidding process of getting these contracts done, I think shouldn’t necessarily be open to the entire community at large because it becomes too cumbersome. You want people to have confidence in the process and I think what you really want to make sure is that there is integrity in how the bidding process, for instance, is done.”
What is required to be disclosed? First, according to Robert Ferrara, director of management at Anker Management in Hartsdale, “the board is required to issue yearly financial reports, prepared by an accountant. It is the full audit of the books, balance sheet, cash flow report—and basically all the financial aspects of the property. While it doesn’t give the actual tax returns, it gives them information on taxes on the property.”
The other document the law specifies must be sent directly to shareholders is a notice regarding the annual shareholders’ meeting, which, in the case of co-ops, may be served as early as 60 days in advance and no later than 10 days in advance.
The documents the co-op must draw-up and keep on file are covered by Article 6 of the BCL, which requires board of directors to “keep correct and complete books and records of account and keep minutes of the proceedings of its shareholders, board and executive committee.” The corporation must also keep a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates they took ownership. These records should be held at “an office of the corporation,” which, in practice is commonly the managing agent’s office or, for smaller, self-managed properties, with the board’s treasurer or secretary.
Under the BCL case law, that is, judges’ interpretation of the law as determined by their ruling on cases brought before them in court, any shareholder is allowed to review the corporation’s other books and records, so long as the inspection is sought for a purpose consistent with the shareholder’s right to monitor his investment in the corporation.
The practices of condominium boards are dictated by the New York State Property Law, Article 9-B, the Condominium Act. The Act declares that “copies of the declaration, by-laws, floor plans, and any rules and regulations shall be available for inspection in the office of the board of managers.” Once a year, the Act says, boards must produce a “written report summarizing receipts and expenditures.” Technically, says Ferrara, “other than that, nothing much else is required.”
The section in the Act on keeping records of the ongoing operation, as with the BCL, is brief. In a slim paragraph, it stipulates that boards “keep detailed, accurate records, in chronological order, of the receipts and expenditures arising from the operation of the property.” Owners are entitled to access to such records “at convenient hours of weekdays.”
Total Access for Board Members
Unlike owners at large, all of the members of the board of directors, entrusted as they are by owners to run the business of the corporation, have the right to examine and even copy nearly all of the records on file. The management company is an agent of the board and as such must produce any of the records they keep on file to any board member on request, except any litigation involving that board member.
Because co-op and condo boards are required to produce some records for examination by owners within a reasonable time frame, they should keep close tabs on how well their managing agent is storing the property’s records. And there is another cogent reason: some records could be essential for an association’s defense in a lawsuit.
“There’s a litigation matter I’m consulting on where it is important to have old records concerning monthly charges, rental agreements and the like,” says New York real estate attorney C. Jaye Berger, “and they seem to have gotten lost in the transition from one management company to another. The loss may cause a real weakness in the case [which is pending]."
“Boards might assume when they say, ‘please transfer the files,’ that everything will be transferred in an orderly fashion,” says Berger. “But sometimes when there is a transition, like when the board fires a management company and hires a new one, documents are lost in the process. That is a scary thought.”
Both the BCL and the Condo Act require that board of directors record and hold the minutes of their meetings, which are closed to other owners. But they have nothing to say about the contents of that record.
Minutes: Just the Facts
While most state statutes and co-op/condo bylaws prescribe that there be an annual meeting, boards are not forbidden to call more frequent sessions, says Goldman. Some boards and associations hold semi-annual or informational meetings, he says. “Some provide meetings on a more frequent basis to provide more specific information in certain areas like buildings and grounds. They might have a shareholder or unit owner forum. So just because your legal requirement is once a year, I don’t think you should limit that. I think you should go out there as often as you need to in order to keep your unit owners or shareholders informed.”
As for minutes, “There are no precise regulations for the preparation of meeting minutes,” says Hartwell. “As a general rule they should be prepared in such a way that somebody reading the minutes who did not attend the meeting can reasonably ascertain what business was performed by the board of directors at that meeting. They should be somewhat succinct—not paragraph after paragraph about what the discussions were.” It is basically a chronology of the meeting, with topics discussed and actions taken or deferred.
On more sensitive issues, if, say, “the board makes a decision to start collection procedures against a particular owner,” advises attorney Stuart Halper, principal of the New York-based Impact Real Estate Management, “the discussion generally doesn’t get recorded, but the decision should be.”
In general, Halper encourages abundant disclosure in the board’s communications with their association, but discretion is important in the case of minutes of their meetings. “You want board members to have freedom to discuss things openly in meetings,” he explains.
Indeed, most managers and consulting attorneys recommend a policy of openness. “An appearance of less than full disclosure on important issues,” says Hartwell, “simply raises in the mind of the unit owners, rightfully or wrongfully, that information is being hidden, or maybe the decision process wasn’t really consistent with business principles, or somebody has been involved with self-dealing.”
At the same time, experienced board members come to understand that no amount of disclosure can prevent some, often intense, resistance.
“People don’t read agendas,” says Hartwell. “So if the board comes up with an idea that all of them believes would be good, it may not generate much interest — until all of a sudden somebody shows up to a meeting and says, ‘have you heard so-and-so wants to spend $2 million to put a gym in the building? [Hartwell represents some very high-end residences]’—and it flies around like wildfire.”
“It’s easy to generate interest based on negativity,” explains Hartwell—“much easier than it is to generate interest based on a positive, especially with special assessments. People don’t see all the behind-the-scenes work, so they imagine that work never took place.”
Don’t Get Crazy
Halper encourages boards to err on the side of openness in their communication with owners. “Good disclosure makes for a healthier, financially sound building,” he says. But he has seen boards go over to the dark side of transparency: “Some boards get crazy and want to publish people in arrears—post them on the bulletin board—to embarrass them into paying. It’s not illegal, it’s totally truthful and it’s not confidential. But do you really need to people getting into fisticuffs over it?”
Board members are allowed unlimited access but shareholders and unit owners are only entitled to what is allowed by law. Resident shareholders and unit owners also do not want their individual files open to review, Goldman replies.
Transparency, explains Halper, “is a balancing act. The more disclosure you have, the better you can run the business. It is the business concept of ‘perfect information.’ The more you have, the better the decision you can make. But you can create problems with information that you put out there that you should not put out there.”
Goldman agrees. He adds that selecting specific contractors is part of any bidding process but the board should take care not to reveal too many details of the negotiations or else the process could be damaged. Once you have real numbers and have an actual bid, that is when resident shareholders and unit owners should know, he says.
A Successful Disclosure Program
Ferrara describes an example of a disclosure program regarding a major project—and subsequent assessment—that worked well. Anker helped guide the board of a huge, 39-building homeowner’s association in White Plains, New York through the approval of an expensive, multi-year roof-replacement project.
First, the board commissioned a roof consultant to write an exhaustive report, an abridged version of which they distributed to unit owners. After leaving the owners some time to review the plan, the board held a special meeting featuring a presentation by the consultant, who explained his report in detail and took questions. They followed up right away with a letter to all the unit owners with a summary of the meeting. They allowed any of the owners to visit the management office to review all the records related to the project. Once the project and special assessment were approved by the board, they notified owners about the decision and gave them a building-by-building construction schedule.
Taking pains to be transparent paid off, observes Ferrara. “While the unit owners may not be thrilled with having the assessment, they have been positive with how they have been kept informed along the way.”
Steven Cutler is a freelance writer and a frequent contributor to The Cooperator.