Publication Date: Winter 1999

Every autumn, the Council of New York Cooperatives & Condominiums holds its day-long, information-packed Cooperative Housing Conference, where more than 60 workshops and seminars present unequaled opportunities for board members and potential board members of cooperatives and condominiums to learn and to share information on every aspect of operating their buildings. This unparalleled learning experience provides guidance and inspiration to New York cooperators and condo unit owners.

CNYC held its 11th Annual Cooperative Housing Conference on Sunday, November 15, 1998. With more than 600 attendees and 100 speakers leading 60 interesting and informative workshops, the Conference met expectations as the premier educational event for shareholders and unit owners in New York's housing cooperatives and condominiums.

In one of the workshops, attorneys Doug Heller and Walter Goldsmith of Friedman, Krauss & Zlotolow offered participants a detailed blueprint for judging their performance as board members. Here are the highlights of their presentation.

STANDARDS FOR BOARD PERFORMANCE

Cooperative housing corporations and condominium associations in New York State are created pursuant to State law and are required to provide owners with documents that describe their rights and responsibilities. The Boards of Directors and Boards of Managers elected to govern housing cooperatives and condominiums take on a fiduciary responsibility to act in the best interests of their cooperative or condominium, using their best judgment and acting in concert as a board.

Shareholders and unit owners have the ability to keep board members in office by reelecting them at subsequent annual meetings, to remove them by failing to reelect them or by procedures designed for fast removal. This workshop provides performance standards to help shareholders and unit owners determine if theirs is a good board and offers the following guidelines for board members in upholding high standards of board performance.

First, boards need to know and obey the rules of running their cooperative or condominium. This, says Mr. Heller, includes knowledge of local, state and federal laws, as well as the documents of the building. When an issue arises that can be resolved by language in the proprietary lease or the declaration of condominium, the by-laws, house rules and any procedures pamphlets that the building may have, the board should know where to look. "New board members should read their buildings' documents, not necessarily to memorize them, but to familiarize themselves and know where items can be found," he says.

STAYING OUT OF COURT
Boards that do not follow their documents can easily run afoul of the rules and may even be brought to court by shareholders or unit owners. An example is the so called "flip tax" or transfer fee, which is not a tax at all but an amount some cooperatives charge sellers upon the sale of their units. Boards need to know that they cannot amend the governing documents of the co-op to institute a flip tax without a vote of the shareholders.

Conversely, boards may be able to institute other changes, such as the addition of or changes to sublet fees, without a shareholder vote. A knowledge of the law and of the building's governing documents will help clarify these issues.

KEEP ON TOP OF CHANGING LAWS
As far as laws are concerned, the board and its managing agent must keep on top of all regulations and amendments that apply to the building. For example, Local Law 10 regarding facade inspections has been amended by Local Law 11 of 1998, which requires more invasive examinations and more specific reports written by licensed architects and engineers (see page 14). Various publications provide information and insights as new laws appear. CNYC membership is very helpful in this regard.

MANAGEMENT EXCELLENCE IS VITAL
Boards must make sure they have a good working relationship with their property managers. Concentrate on keeping lines of communication open, so that the board is kept informed of new laws and other developments. "Talk to your manager," says Mr. Heller."You need to be able to trust your managing agent, because you depend on him to keep you informed. "If your managing agent is not doing his job, the board may find itself in hot water.

For example, the manager should make sure window guard notices are sent to all tenants, and are completed by all residents who have children under age 11 living in their apartments. If the manager neglects this important annual responsibility, the board could very well be held accountable, says Mr. Heller.

RESPONSIBILITIES OF BOARD MEMBERS
Boards that open the gates for wrongdoing ?even by the slightest amount ? could quickly find themselves at the helm of a sinking ship, say Mr. Heller and Mr. Goldsmith. To prevent this, always be on guard against questionable activity by board members or by the professionals you hire.

Some basic rules: "Don't let board members be hired as contractors," says Mr. Heller. "Don't hire a lawyer who lives in the building.Don't engage in self-dealing." This term refers to board members using building property, employees or services for their own advantage, explains Mr. Heller.

It applies in very small instances, as well as in very important things. For example, if a board member uses the building's vacuum cleaner to clean his own apartment, that could be considered self-dealing. A major problem for boards is the issue of illegal activity by the managing agent. Although some managers and firms have been investigated and indicted by the District Attorney, others may still be taking kickbacks and engaging in other activities without your board's knowledge.

One way to prevent such problems is to establish and enforce careful procedures for approving all disbursements, such as purchase orders with board countersignatures or a policy of having two signatures on all checks. "It's much harder for a manager to steal when he needs an accomplice," says Mr. Heller. In addition, make sure to verify items in all monthly reports. Boards that do not check their income and expenses are easy marks for theft.

RECOGNIZE INCOMPETENCE
Since you depend on a number of professionals and consultants to help you run your building, it pays to make sure all of these people are performing their duties competently. Incompetence can rear its head anywhere, so the board needs to look at everyone.

For example, your insurance agent should be able to recommend coverage that will keep your building adequately insured. "Your agent should be visiting your building at least once a year to explain your coverage and make sure you have enough," says Mr. Heller.Your insurance agent should also be able to suggest new or improved policies or riders that can benefit your building. One little-known and inexpensive rider, called "code coverage", will make sure you are covered if a change in local laws or other codes makes it more expensive to repair or rebuild your building, says Mr. Heller.

By contrast, your insurance agent should not try to sell you unnecessary or illegal coverage. An example is criminal defense coverage, which became popular following 1997's widely-discussed window guard case, People v. Premier House, Inc. The caveat, however, is that New York State doesn't allow this type of coverage.

RECOGNIZE DIRECTORS' SHORTCOMINGS
The board also needs to recognize inadequacies among its directors and officers. Educational opportunities, mentoring arrangements and briefing sessions by the president, the treasurer, and the manager will help get new board members off on the right foot. If a board member does not appropriately shoulder responsibilities, there is provision in the documents for the board to remove a member.

Shareholder issues are also important. "Don't ignore problems," says Mr. Heller. "If there is someone in your building who may seem incapable of taking care of themselves, make sure you call in the proper services or agencies to ensure their well-being and the well-being of the rest of your residents."

Similarly, don't ignore nuisance shareholders. A noisy shareholder could lead to other shareholders withholding maintenance payments, and the board's negligence in such a matter could cause the board to lose in court, says Mr. Heller.

FOCUS ON COMMUNICATIONS
Good communications between boards and owners is key to a well-run cooperative or condominium, says Mr. Goldsmith. Owners are interested in any information that could affect their lifestyles or the value of their apartments. For example, information regarding board policy in matters such as subletting and pets, as well as plans for building improvements like lobby renovations and facade work, should be regularly communicated to owners.

Brief newsletters distributed on a regular basis are an excellent source of information. Correspondence to owners from the managing agent can also be useful.

On major issues, such as expensive building-wide renovations, boards should not be reluctant to call special shareholder meetings, says Mr. Goldsmith, especially where owners may be anxious or upset about the work.

Effective communications among board members is also crucial, says Mr. Goldsmith. Personal agendas of individual members must be swept aside so that all can focus on the building.

"It is your fiduciary duty to use your talents, intelligence, energy and effort for the good of the building," he says. "Don't get involved with ?he said/she said' arguments or ego battles on the board. Instead, try to set a good example for everyone else. You'll be surprised how fast an average board can become a good board, and a good board can become an excellent board."