Stand in Judgment Does Your Board Hold Up to Scrutiny?

Stand in Judgment

Every home is an investment, but for co-op shareholders - and, to some extent, condominium unit owners - their home is also part of a business. As with any business, good management can make or break it and in a co-op or condominium, a big part of that management team is the building's board of directors. Like any corporation, the board has a fiduciary responsibility to shareholders to oversee building operations and finances. But when shareholders are also neighbors, and when quality of the living environment can be affected by the board's decisions, the stakes are high and board members must remember to keep a keen business sense and not be ruled by their personal feelings.

"Board members need to remember that their primary fiduciary responsibility is to the corporation, not to individual shareholders," says David Goodman, director of business development for Tudor Realty, a Manhattan management company. "It's a subtle difference, but it needs to be remembered, for example, when making budget considerations or deciding on maintenance increases." He adds that, "[Board members] can't just think about their own pocketbooks," but need to think of the long-term benefit to the corporation of, say, a flip tax, or assessment to do preventive work that will be beneficial in the future.

Signs of a Good Board

So how do you know if your co-op or condo board is doing a good job?

"First and foremost, ask if a building is run well from an operations standpoint. Is the super responsive? Are systems in good order? Are there good doormen and porters?" says Daniel Altman, an attorney with the Manhattan law firm of Belkin, Burden Wenig & Goldman, LLP. "Secondly, look at financials; is money spent efficiently, or is the board constantly asking for maintenance increases? That's usually a red flag."

Altman cautions, however, that in the current economic environment a maintenance increase or special assessment may not, necessarily be a sign of poor money management. Many buildings have been forced to raise maintenance fees due to skyrocketing real estates taxes and increased insurance and fuel costs.

Communication is Key

Industry experts agree, one of the most important characteristics of a good board is communication with the shareholders. "If people don't hear anything, they draw their own conclusions and that's how rumors get started and trouble brews," says Dan Wurtzel, chief operating officer for Cooper Square Realty, a Manhattan managing agent. Wurtzel explains that good communication helps a board even when the news they are communicating is not all good. "If a building has no communication and then the first they tell shareholders is that there is going to be a 15 percent maintenance increase, there will be a lot of animosity among shareholders." Take the same scenario in a building that has a lot of communication from the board and, while the shareholders may not be happy with the increase, at least it will not come as a total surprise.

"Just because people read about 18 percent increases in real estate taxes in the papers doesn't mean they know how that fits into their monthly maintenance fees," says Wurtzel.

Boards have several ways to communicate with the shareholders. One of the most popular forms is a monthly or quarterly newsletter. The newsletter is not always prepared by a board member, but typically has some input from the board. Enid Hamelin, vice president on the board of her Greenwich Village co-op says her building has a newsletter prepared by a non-board member, but each issue contains a "Board Report" which will have information on current projects such as the status of a new laundry room or planned roof work.

Some boards may hand out "sanitized" minutes of every board meeting to shareholders. These minutes will leave out any personal information discussed about shareholders or prospective shareholders. Altman however counsels his clients against this practice. While all shareholders have a right to review the minutes, he does not advise sending them out in the normal course. He also advises against having shareholders attend regular board meetings. "This opens the board up to liability. The board should not be second-guessed."

Most of All, Be Fair

Another characteristic of a good board is "a sense of rationality and even-handedness in the decisions that boards impose on shareholders," says Donald Levy, director of management for Lawrence Properties, a Manhattan property manager and a shareholder in a 220-unit Manhattan co-op. An example is an experience Levy had in his building several years ago when the board arranged for a program where shareholders could elect to have their toilets replaced with low flush toilets to conserve water. When the program was finished, the board announced that at the time an apartment is sold, any toilet not converted would require a $500 penalty to be held in trust by the corporation's attorney until a new toilet is installed. Levy says if shareholders had known about the penalty up front it may have affected their decision. "The problem is not with the policy per se, but that all the facts were not laid out up front."

Vote Wisely

Since shareholders or condominium unit owners elect the board of directors, there are some points to consider when it comes time to vote. According to Steve Greenbaum, director of property management for Mark Greenberg Real Estate (MGRE) on Long Island, a good candidate is "someone who can volunteer their time and has some knowledge of the role or assignment they are running for." For example, the candidate for the position of treasurer should have some financial knowledge or background. "Most importantly though, they need to be able to devote the time and not have their own agenda. They should be doing this as a labor of love and not to boost their own ego. It's counterproductive if all they want to do is change the lobby or hire a new super or change the windows in their apartment."

Greenbaum says that in buildings his firm manages, shareholders usually form a nominating committee. Interested shareholders submit their resumes to the committee, which puts together a slate of candidates. Each candidate gets a chance to speak at the annual shareholders meeting to tell what they think they can contribute to the building.

While some buildings have self-perpetuating boards with little turnover, other buildings may have several new members come on all at once, which could spell trouble for the building. To help bring new board members up to speed, Wurtzel says his firm prepares a handbook for new members specific to each building that they manage. "We want to educate new members so they fall in line more quickly so it isn't a six or eight-month struggle." The handbook has copies of minutes of all meetings over the past two years, status reports on current projects and copies of the building rules and policies.

Providing Good Management

Board members are volunteers - many with fulltime jobs and other responsibilities - so they need to make sure they have a competent managing agent that can handle the administrative details and oversee daily operations. "It's very important to have a managing agent that will support and guide the board. Most board members are not in the business, so they need a managing agent who understands, for example, all the components involved in replacing the roof or why it is not a good idea to continue patching."

From a managing agent's perspective, "the best board members remain involved but do not micro-manage. If the managing agent is so scrutinized in every thing he does, they are not able to function," says Levy. "You hope that board members are not focused on their own personal issues. The managing agent needs to be careful approaching these situations because it's easier to get rid of a managing agent than board members," he says, adding that usually other board members are aware when someone has his or her own agenda.

So what do you do if you suspect one or more board members is not acting in good faith for the collective good of the corporation? Altman says most bylaws have provisions for removal of a director with or without cause by calling a special meeting.

Most experts however, caution that this causes a great deal of dissention among shareholders and makes it very difficult for the building to function properly. When asked about what to do with problem board members Greenbaum says, "A year goes by very quickly. If people are that unhappy, they will be very vocal at the next board meeting."

Meryl Feiner is a freelance writer based in Manhattan.

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