I suspect my property manager is corrupt. How can I find out if they're taking kickbacks, and what should our board do if they are?
"It’s really hard to figure out if somebody is taking a kickback, because they are by their nature, surreptitious," says Steven Wagner, a co-op and condo attorney at Wagner, Berkow & Brandt, and a longtime board member of his own 412-unit Manhattan co-op. "It’s similar to trying to prove discrimination. It’s difficult to show because they’re trying to hide it."
Corrupt managing agents are, thankfully, a relatively rare phenomenon, says Wagner. "Most managing agents aren't taking kickbacks, but a board should still do their due diligence."
If you’re concerned there are signs of shady dealings in your building’s finances, you may see a questionable payment pattern or credits being recorded when they shouldn’t.
An independent accountant can do a fraud audit, which will guide your next steps. A diligent treasurer and the right insurance can help protect you in the future.
Scrutinize the payment patterns
Most regular expenses in a co-op or condo are fixed and paid every month without an approval process—mortgage payments, insurance, taxes, payroll—but some expenditures like repairs and supplies do require approval. Very often there’s a set dollar amount over which approval is required. For example, purchases under $1,000 might not need approval so that small expenses—cleaning supplies or holiday decorations—can be more easily purchased.
However, this can provide a loophole. In one case Wagner had been alerted to the fact that there were multiple invoices for sums just below the approval threshold.
“If you find these kinds of irregularities, you need the person who is filing the claims to give you an explanation. It doesn't necessarily mean something illegal is going on, but it could be a sign that funds are being misappropriated," Wagner says.
Get involved with a turnover of contractors or vendors
If the board brings in a new managing agent, they will often want to work with new vendors and contractors with which they already have established relationships. There are plenty of legitimate reasons for doing this but to make sure it's not just a case of greased palms, the board should be involved in this kind of turnover.
"The board should know the vendors they're using, and not have the managing agent change them all without some oversight and explanation," Wagner says. "There should be a reason given, and a discussion about the changes," he says.
Make sure accounts are separate
A responsible managing agent should keep separate accounts for its own funds, as well as the reserve funds and the operating accounts for each of the buildings they manage.
"There should be discrete accounts for each co-op or condo building they manage, and the managing agent shouldn't combine funds between different buildings, or with their own funds," Wagner says.
If it's all going into one large account, says Wagner, "it can almost be like a Ponzi scheme—they can take your money, but someone else's money is still in the account, so they can claim it's yours if you ask."
The status of your building's accounts should be easy to fact check with records from the financial institutions involved. One tip is to check on the reserve funds in the middle of the month, to see if any fishy transactions are taking place in between the reports being submitted at the beginning and the end of each month.
Look at payment tracking reports
In one case of fraud, Wagner discovered irregularities where the tenant history reports showed a few shareholders getting credits issued for their maintenance charges instead of showing that payments were being made. This was a red flag.
“If shareholders are making their payments as normal but they are being recorded as a credit instead of a payment, it could be a sign that the payments are being deposited elsewhere. The manager could have undisclosed accounts in the name of the co-op where the payments are being deposited,” says Wagner.
The treasurer should be on the lookout for irregularities like this and ask for more information if the explanation given isn't detailed enough. You can also ask for the bank records, as opposed to taking the managing agent's documents at face value.
If you look at the shareholder payment records and spot anything suspicious, it’s time to start asking some questions.
If your board uncovers signs of a potential problem, these concerns should be raised with the managing agent. Request any necessary records be made available to the board.
"Board members have the right to look at any document they need to make sure they're properly performing their fiduciary duties," says Wagner. "You can do this ahead of hiring a lawyer or accountant.”
An independent accountant will then be able to conduct a fraud audit for the building and take a deeper dive into the numbers, to turn up potential proof of the managing agent's corruption.
At that point, depending on the scale of the managing agent's wrongdoing, the board may want to consider changing managing agents. Wagner points out that a lawsuit is really a last resort unless the building has lost a truly large sum of money.
"Boards have plenty on their plate to deal with, and need to focus on running the business of the corporation rather than recovering every last penny they think they lost from the managing agent," Wagner says. "Litigating for fraud over a five-figure amount may not be the most productive use of a board's time and resources.”
Safeguards for the future
It's standard for most co-op and condo management agreements to stipulate that the managing agent has insurance against fraud but it's worth double checking to make sure the board is named as an additional insured party. That way, if the managing agent perpetrates fraud, the building can directly make a claim, rather than having to sue for the money.
If the managing agent and the sponsor share an accountant, a contractor, or an attorney, it's wise to keep an eye on the situation.
"You don't have the typical checks and balances you would normally in order to insure that the building's funds are only paying for things that benefit the building, as opposed to, for instance, work on the sponsor's individual units," Wagner says.
"There are ethical ways to deal with this, if there's full disclosure and the prices are reasonable, and everyone involved agrees to waive any conflict of interest," he says.
When it comes to protecting payments, the board might consider requiring two or more signatures on a check, so money can’t be withdrawn by an individual and put in a different account. “Another option is to make sure checks are signed by board members,” Wagner says.
To prevent management from hiring overpriced cronies for every job in the building, the bidding process should be opened up, with a board member and architect reviewing potential bids to make sure jobs are being awarded to the most competent and well-priced contractor or vendor available.
New York City real estate attorney Steven Wagner is a founding partner of Wagner, Berkow, & Brandt, with more than 30 years of experience representing co-ops, condos, as well as individual owners and shareholders. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Steve an email or call 646-780-7272.
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