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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 when somebody is taking a kickback, because kickbacks are, by their nature, surreptitious," says Steven Wagner, a co-op and condo attorney with Wagner Berkow LLP and a longtime board member of his own 412-unit Manhattan co-op. "It’s almost like proving that someone is discriminating. It’s difficult to show because they’re trying to hide it."
Corrupt managing agents are, thankfully, a relatively rare phenomenon, and while Wagner says that "most managing agents aren't taking kickbacks, you should still check into things and be diligent."
That in mind, says Wagner, there are some telltale signs that shady dealings might be afoot in your building. Below, a guide on what to look out for, how to stop corruption before it starts, and what to do if your instincts are right.
Signs that there may be a problem
- A questionable payment pattern. While many regular expenses of a co-op or condo are fixed and can be paid every month without a clunky approval process—mortgage payments, insurance, taxes, payroll, etc.—in most buildings, expenditures on things like repairs and purchase of supplies require approval. However, there's often a set dollar amount ($2,500 is common, depending on the size of the building) under which approval isn't required, the better to avoid excess hassling over small expenses. But for someone skimming a little off the top, this can be a loophole ripe for abuse. "For example, I once worked with a building where the approval limit was $1,000, and eventually someone noticed bill after bill coming through just under that—$985, $960, $990," says Wagner. "If you see a whole bunch of expenses coming through just under your building's approval limit, it doesn't necessarily mean something illegal is going on, but it could be a sign that funds are being misappropriated."
- Total turnover of vendors. Oftentimes, if a new managing agent joins the building, they'll want to clean house and bring on vendors and contractors they've worked with in the past. There are plenty of legitimate reasons why management might want to bring on vendors they know and trust, but to ensure it's not just a case of greased palms, the board should be involved in this kind of turnover. "The boards should know the vendors they're using, and not have the managing agent change them all without some oversight and explanation," says Wagner. "There should be a reason given, and a discussion." Particularly because the building's managing agent end up making purchases, even if they're spending small amounts below the oversight threshold, if they're corrupt, "over a year or several years, that can add up to a lot of money," says Wagner. "It's not a small thing."
- All the money is co-mingled. A responsible managing agent should keep separate accounts for their own funds, as well as the reserve funds and operating accounts of the buildings they manage. "The typical management agreement requires segregated accounts," says Wagner. "The managing agent should have discrete accounts for each co-op or condo they manage, and shouldn't combine funds between different buildings, or with their own funds." 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 on this front should be easy to fact check with records from the financial institutions involved.
- Irregularities with the residents' monthlies. One last area that has the potential to play host to foul play: the building's tenant history reports, which track payments by tenant-shareholders or unit owners. "If there are any discrepancies in the reports—for instance, on a long list of people who've been charged and made payments, someone shows up instead as having a credit—a red flag should go up," says Wagner. Seemingly random credits to individual owners can often be a sign that money coming in from monthly payments is being shuffled around in unsavory ways.
- Check on the insurance. It's standard for most co-op and condo policies to stipulate that the managing agent has insurance against fraud, but it's worth double checking to make sure you're covered. Additionally, it's wise to arrange for the co-op or condo to be named on the policy 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.
- Have a treasurer you can trust. "The treasurer is your first line of defense," says Wagner. "He or she should truly review the materials presented by the managing agent, and ask for more information if what they're given isn't detailed enough." The treasurer should be on the lookout for red flags discussed above, including mysterious credits to owners, money going in and out of the reserve funds, or accounts that aren't properly segregated. And if there's anything that's unclear, they should ask for records straight from the bank, as opposed to taking the managing agent's documents at face value. Another smart tactic: checking in 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. "The treasurer's job may be the toughest and most important in the building," says Wagner.
- Institute checks and balances. 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 have 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," says Wagner. "There are ethical ways to deal with this, if there's full disclosure and the prices are reasonable, and everyone involved signs an agreement to waive any conflict of interest."
- Allow open bidding for new work. 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 that jobs are being awarded to the most competent and well-priced contractor or vendor available.
Confronting corrupt management
If your board or treasurer has uncovered signs of a potential problem, they can first bring their concerns to the managing agent, and request any necessary records be made available for them to further investigate. "It's a general rule that 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 before you go out and hire a lawyer or accountant."
The next step is to hire an independent accountant to conduct a fraud audit for the building, who can do a deeper dive into the numbers, and turn up potential proof of the managing agent's corruption. ("I won't move forward with a case like this unless there's an accountant who will be able to back up claims of financial fraud," notes Wagner.)
From there, your next steps depend on the scale of the managing agent's wrongdoing. "If there's a real problem, the board may want to consider changing managing agents, but even if they do, my general rule of thumb is not to bring a lawsuit unless you have no choice, or are going to make a lot of money," says Wagner. In other words, unless the managing agent has ripped off the building for a truly large sum of cash, it's often wisest for the building to cut its losses and move forward rather than diving into litigation.
"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," says Wagner. "And trying to sue for fraud and defalcation over a five-figure amount is usually not the most productive use of a board's time and resources. That’s why board members should check to make sure insurance is in place. If there is a claim, the board can get paid by the carrier and then let the carrier spend its money to recover the missing funds.”
New York City real estate attorney Steven Wagner is a founding partner of Wagner | Berkow with more than 30 years of experience representing numerous co-ops, condos, and individual owners and shareholders. To submit a question for this column, click here. To ask about a legal consultation, send an email or call 646-791-2083.