Published: Summer 1993 CNYC's annual Cooperative Housing Conference, held each autumn on a Sunday, is New York's most comprehensive source of cooperative and condominium information and education. With product exhibits to visit from early in the morning and dozens of workshops and seminars, the Conference brings together hundreds of CNYC members for a day of learning and sharing. Reviewed are reports from three workshops presented at the 12th annual Cooperative Housing Conference. CONTROLLING VARIABLE COSTS Conventional wisdom says that about 80 percent or more of your building's expenses are fixed and you can't do anything about them. According to CNYC board member Ted Procas and managing agent Andrew Hoffman, the speakers at this workshop, nothing could be farther from the truth. "Every line on a building's budget is variable and negotiable," said Mr. Procas. "Even the two largest items: taxes and labor." On the tax front, Mr. Hoffman, a principal of a building management firm, urged boards to file for tax certiorari, or a reduction in your tax assessment, every year. "Assessments go up every year, and any assessment that is not protested by March 1 will stand for the year. So the longer you wait, the more you have to lose." While the common practice is to hire a certiorari attorney to do the work, you don't have to pay him the traditional 30% to 35% of the tax assessment reduction, said Mr. Hoffman, who also serves as president of the Community Housing Improvement Program (CHIP). "In many of my buildings, we're paying only 17% to 18% to attorneys. There's no secret to doing it: you just have to open up your mouth and ask. That's the most important thing a board can do." With some union employees earning as much as $42,000 with benefits, it pays for co-ops and condos to take a hard look at their labor costs. One of the biggest culprits is overtime. "Overtime should be so rare that you only pay it a couple of times a year," said Mr. Procas. "Instead, many buildings pay huge sums every week." A typical scenario, added Mr. Hoffman, occurs at the 24-hour doorman post. If you have 4 doormen working 40-hour weeks made up of 8-hour shifts, there are going to be 8 extra hours each week. In many buildings, this extra shift is worked by one of regular doormen at time-and-a-half. "It is the treasurer's job to look at this," explained Mr. Hoffman. "Get a printout of the doorman schedules [from ADP or your management or whoever handles payroll]. If you have this situation, look into using someone from the building or the neighborhood to fill in that extra shift. In one of my buildings, we have a retiree who fills in for overtime and vacations. It saves a lot of money." Considering your building's needs, you may also have too many workers on staff. Look into eliminating certain jobs. "In the rental days, buildings had larger staffs because the landlord was responsible for doing work in apartments," said Mr. Procas. "In co-ops and condos, you may find you don't need the excess help." In union buildings, however, reducing staff can be an arduous process. Under Article 7, Section 2 of the Building Service Employees' Union (32B-32J) agreement, buildings have to provide as much detail as possible to prove they do not require the current number of staffers. This can be straight-forward if the worker is a elevator operator and you have just installed automatic elevators, or if he is a painter and you are no longer responsible for painting tenants' apartments. It can be more difficult if his job is less specific. Once you make your claim, the union has up to one year to file a protest. "They take their time," said Mr. Procas. "And if you lose, the union can spread the cut man's rate over the rest of the employees, claiming that they 'worked harder in his absence.'" Mr. Procas noted that boards should "get involved in union contract negotiations. Come out in numbers. The Council of New York Cooperatives & Condominiums has been involved for years, and it needs the backing of its constituency. Mr. Hoffman added that the union holds less sway over co-ops and condos than it does over rental buildings. "The 1991 strike proved that," he said. "It showed that shareholders and unit-owners were willing to come out and man the doors or sweep the sidewalk, to take an active interest in times of adversity." In addition to these large costs, boards should look at such line items as service contracts, supplies, and fuel. "Negotiation is a key element here," said Mr. Procas. "You have to talk to vendors, explaining to them what you are willing to pay. If you're fair, they'll still want your business and they'll make concessions." He said that some buildings have been able to reduce service contract costs by 30% to 40%. Another key element is vigilance, as Mr. Procas concludes: "It is easy to spend $1 million by paying $1.25 for items that should only cost $1. If you don't watch what you spend, you're bound to lose." LANDSCAPING & ROOF GARDENS In hard economic times, boards have learned to file improvements into two categories: absolutely necessary and entirely frivolous. Generally, unless a board has time or money to spare, landscaping and roof gardens fall into the latter. Yet according to building manager Neil Davidowitz and Signe Nielsen, a landscape architect, there's much more to a roof garden than meets the eye. "Creating a roof garden has a tremendous impact on quality of life," said Mr. Davidowitz. "But it also has a direct correlation to purchase prices and the ability shareholders have to resell their units. It's a clear asset to any co-op where apartments are not selling. You wouldn't forego a new boiler for a new roof garden, but it could have as much or more impact on value." It could also be as much, or more, of a chore. In fact, most of the work involved in installing or redesigning any landscaped area begins before anything is ever planted. Communication. This may be the most important stage. "You will never have 100% of the people in favor of any one plan," noted Mr. Davidowitz. "Any time aesthetics come into play, expect dissent." Penthouse and top-floor owners are often the first to voice concern. "These are the people who paid a premium for their apartments, and they're going to want to control what goes on up there," he explained. Communicating should be the job of a specially chosen roof design committee, which acts as a liaison between the board, the shareholders, and the landscape architect. When a design is chosen, for example, the committee should post the renderings in the lobby and request public comment. "Never proceed with a job like this without first getting input from shareholders," said Mr. Davidowitz. "If you assume people won't have anything to say, you're asking for trouble." He explained that at least one member of every committee should be a board member, who would be relied upon to report all committee decisions and progress to his or her fellow directors. Decision. To calm any concerns, and to help you focus on your design needs, Mr. Davidowitz and Ms. Nielsen recommended that your committee answer the following questions before moving forward: When will people be allowed to use the roof? Some co-ops set hours from 9 A.M., when people leave for work, to dark. Yet people don't always obey the rules. "If you leave the lights on during the night, you're extending an invitation for people to hang out up there at all hours," said Ms. Nielsen. "If you don't want them there, shut off the lights. Generally, people will not go out on a dark roof." What will people be allowed to do on the roof? Some roof areas are used for quiet gardening and sunbathing, others become playgrounds for children who live in the building. If you plan to allow any high-impact activity, first make sure your roof will be able to withstand the beating. If you foresee large potted trees or significant areas covered with soil, you may also need roof reinforcement. Consult with a structural engineer before making any decisions. According to Ms. Nielsen, roofs on buildings built before 1928 had to, by law, be able to withstand 120 pounds of pressure per square foot. After 1928, the requirement went down to 40 pounds per square foot. Such a gap in capacity can make a big difference when potted trees are set in place. Tip: You may be able to couple an engineering study with any Local Law 10 work you may be doing, says Mr. Davidowitz. Also, roof-load information may appear in your co-op's or condo's offering plan. Another consideration is sunbathing, which comes in many shapes and forms. At one building, noted Ms. Nielsen, some shareholders wanted to be able to sunbathe nude. To accommodate them, and keep them apart from young or less-tolerant eyes, the board had a separate area constructed. Also, if you plan to allow cooking on the roof, you should consult local fire regulations on allowable materials. What will people be able to see? If you have penthouse units abutting the common roof area, privacy becomes an issue. Some buildings construct fences to block certain areas. Fences, however, will need to withstand high winds and other elements. This often requires sinking them into the roof surface or securing them to other solid structures – measures that add significantly to your final cost. What do you want to pay? Roof gardens are generally priced according to square footage. The least expensive gardens go for about $8.50 a square foot, while the most expensive are in the $120-a-square-foot range. "It all depends what you put up there," said Ms. Nielsen. Probably the most expensive item is soil, which must be hauled up to the roof in small quantities at a time. "You have to realize that you have no natural environment on the roof, you have to create it," said Ms. Nielsen. "Bringing all the elements up there is extremely labor-intensive." The same goes for trees. "You have to scale down your vision of what you can put up there," she asserted. "You can't start off with huge trees – how would you get them onto the roof? Everything you have up there must be able to fit in elevators and through doors." Most roof areas require some form of covering to protect the roof surface from foot traffic. The most common covering is basic quarry tiles, which look like terra cotta. These cost between $10 and $22 a square foot, depending on how much sub-base work (reinforcement, pitching, and patching on the roof surface) must be done. Less expensive are concrete pavers, which cost from $8 to $10 a square foot. These rest on buffering pads, which allow water to drain beneath the pavers. One way to reduce the price significantly is to do some of the work yourself. "A test of how important a roof garden is to residents is to ask for volunteers," said Ms. Nielsen, who does consulting with do-it-yourselfers. Added Mr. Davidowitz: "Be aware, though, that you could end up like a lot of buildings, where people were enthusiastic at the beginning, then one by one dropped out. You could find yourself with a half-finished roof garden." When working on your own, remember some considerations. For one, choose planters that will last and provide a proper environment for your plantings. Wood, for example, tends to rot, while heavy-duty plastic or clay pots last five to seven years or longer. The planters must be able to retain water, since roof plants lose water rapidly through soil and very porous planters under direct sunlight and heat. To offset the cost of creating a common outdoor area, some buildings charge a user fee. "This can be effective, but difficult to control," said Mr. Davidowitz. "You can impose some sort of annual fee, but it generally doesn't work as well on a roof as it does in a gym or a storage area." If you're thinking of doing the work yourself, you may want to pick up one of two books recommended by Ms. Nielsen: The City Gardener's Handbook, published by Random House; and The Urban Gardener, by Philip Trueux. Who's going to take care of the plants? Roof gardens require a great deal of maintenance. Plants need frequent watering, sometimes twice a day in the summer, to stay alive. "You want to pick drought-tolerant plants, but you can't use a cactus either, because it won't survive the winter cold," remarked Ms. Nielsen. "From June to early September, the garden will need watering every day, and you can't count on rainfall to do it for you. You have to decide whether you can even count on your staff to do it." She added that staffs often water ground-floor plants while hosing down the sidewalk, but tend to forget about the living organisms up on the roof. One solution is an irrigation system, which uses PVC or copper piping and a timer to water plants at preselected intervals. Systems cost from $1,500 to $3,500, said Ms. Nielsen, depending on the features you select. These can include "rain override," which shuts down the system in case of precipitation, or adjustable nozzles to control flow. Ms. Nielsen advised hiring your installation contractor to provide service and seasonal programming for any irrigation system. Ongoing maintenance is another cost to consider. At a minimum, you should have professional care for plantings four times a year: in March, May, September, and November (you should also have plants checked in July). The procedure includes fertilization in the spring, winterizing in November, checking for pests, pruning and cleaning plants, and maintaining the irrigation system. Some companies also do additional planting or replacement. According to Ms. Nielsen, basic service like this costs between $5,000 and $7,000 a year. For about $15,000 a year, you can get someone to come twice a month and do seasonal planting. When you are ready to move forward, remember to hire a landscape architect, not one who designs buildings. "You need someone who understands what will survive and function the best on your roof," concludes Ms. Nielsen. "Otherwise, you are throwing your money away." The Business Judgment Rule: The Current Standard for Judging Co-op and Condo Boards "In a legal sense, board judgment should be the most simple thing going." began moderator Fred Mehlman, an attorney was head of the New York State Attorney General's Real Estate Financing Bureau from 1985 to 1992. "Unlike almost every other area of law, there's only one case that judges will turn to when they're weighing your decisions. That can be very good. It can also be tricky." The case is Levandusky v. One Fifth Avenue Corp. The facts: Mr. Levandusky, a co-op shareholder at One Fifth Avenue, was renovating his kitchen and wanted to move a steam riser pipe by two inches to accommodate his new cabinets. He discussed his plans with the co-op's architect and received informal approval. He then submitted his design to the board – which did not want the pipe moved. Both the co-op and Mr. Levandusky retained an independent engineer to survey the situation. The engineer said that if the riser was cut carefully, it might not cause problems. Then again, he added, any change to an old heating system could unleash "gremlins" that were not there before the work was done. In other words, it's better to leave well enough alone. Even though the co-op denied Mr. Levandusky's plans, he hired a contractor, who severed the riser and moved it. The board issued a stop-work order, and Mr. Levandusky brought the board to court. He claimed the board was being unreasonable, that there was no evidence that moving the riser would cause problems, and that he would suffer financial loss. "The court then looked at what other courts before it had done," explained Mr. Mehlman, "and they found they had taken two directions. (1) The Reasonableness Standard, in which the board had to demonstrate that its actions were reasonable, and (2) The Business Judgment Rule, which said the courts have no business looking at decisions taken by boards with the honest exercise of their judgment, and with the intention of the honorable furtherance of corporate purposes. As long as there is no breach in the fiduciary duty of the directors, the board's decisions should not be questioned." In its decision, the court adopted the Business Judgment Rule and found for the co-op. According to Mr. Mehlman, there were two reasons: (1) if every board decision were to be brought into question, the courts would be flooded with cases, and (2) as long as a board acts in good faith, its decisions should not be subject to second guessing. To illustrate the breadth of Levandusky, Mr. Mehlman pointed to a number of cases that had been decided subsequent to Levandusky, inviting those attending the workshop to be the judges, before he provided the actual decision. Scenario 1. "A shareholder says the board improperly wants to dig up his private roof garden so it can replace the roof," Mr. Mehlman said. "He claims the roof is not leaking, yet it will cost $50,000 to rip up his garden." The decision: The board has the right to make the decision to do the improvement. Scenario 2. "A co-op adopts an assessment for roof and elevator repairs. A commercial unit-owner refuses to pay, claiming he does not need the roof or elevator. The decision: If the board decides he has to pay, he must pay. "But," added Mr. Mehlman, "what if the board took only the commercial unit-owner to court. Could the decision be seen as the board singling out this owner, who, as it happens, owns more shares than any residential unit-owner? It's still the board's call, especially since he owns more shares, and his input is needed to complete the work." He noted, though, that if a board decides to assess everyone, yet only enforces non-payment proceedings against, say, the two- and three-bedroom unit-owners, it could be seen as selective enforcement. "I would advise against doing this," he said, adding: "The court might also look at what types of apartments the board members live in. If they're all in one-bedrooms, and they're going after two- and three-bedroom unit-owners, they will have trouble." Scenario 3. "A board decides to forbid all subletting. A shareholder comes in and says he's being transferred to Texas, he can't sell his unit in this market, and he can't afford to keep his unit vacant. Meanwhile, the proprietary lease does not give the board unrestricted authority to bar sublets, and the offering plan says subletting is permitted." The decision: The court upheld this board's decision, noting a bad economy does not affect its legitimacy. Scenario 4. "A condo board decides to move a trash dumpster from its normal location in the back of the building to a spot near one apartment's exterior door. The owner claims it is ridiculous to do this." The decision: The board is protected by the Business Judgment Rule. Noted Mr. Mehlman: "The decision does not have to be taken for good reasons, as long as it's not for bad reasons." In spite of the broad protection of the Business Judgment rule, many board decisions can still be called into question. In its decision, the Levandusky court still left room to reverse improper decisions, which it defined as those where: The board action has no legitimate relation to the welfare of the co-op or condo. The board deliberately singles out a board member or shareholder for harmful or disparate treatment. If, for instance, the board at One Fifth Avenue had allowed other shareholders to move steam risers, but refused to let Levandusky do so, its decision could have been reversed. The action is beyond board authority. For example, a board decides that all board members must serve on a security patrol two hours a month, or pay a fine. But the bylaws say all matters involving fees or fines must be discussed and voted on at a general shareholders meeting. The board takes action without proper notice or consideration of the record before it; The board engages in self-dealing for financial gain of its own, and not the corporation. If, for example, a board refuses to transfer shares to a prospective purchaser, and it is later found that the board president had put in a bid on the apartment, but his bid had been turned down, the transfer could be allowed. Or, a case where a board member's supply company sells cleaning chemicals to the co-op without the board having shopped around for the best price. Other challenges have gone through on cases of bad faith and decisions based on discrimination. Concluded Mr. Mehlman: "As a board member, you have some protection, but that doesn't protect you from the need to always use your head."