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What are the new rules for having brokers on co-op boards?

There are new requirements for disclosing contracts to the board. 

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Question:

What are the new laws about real estate brokers being on a co-op board? Does it include spouses? The board president's wife sells most of the units in our building. Should she have to disclose?

Answer:

Yes, she should disclose any real estate deals she made in the building over the past year, our experts say. 

But there aren't new laws that dictate whether brokers can be on a co-op board. Instead, there are amendments made to the business corporation law, which, as The Cooperator explains, governs corporations in New York state. 

This includes co-ops, and the BCL lays out regulations regarding board meetings and more. In 2017, the BCL was amended to include a new section that requires both co-op and condo boards to review their transactions each year and disclose any contracts between the board and an interested director or manager, says Jeffrey Reich, a partner at Schwartz Sladkus Reich Greenberg Atlas.

"Interested" means that "the director or manager has a substantial financial interest (other than their interest as an apartment owner) in the contract," Reich says. "A director or manager can have a substantial financial interest in a contract through which the director or manager’s spouse receives compensation." 

However, because of the way the amendment was written, it may not apply to brokers receiving commission from the sale of an apartment. 

"The definition of an 'interested director' in the business corporation law includes transactions between the co-op and the director or the co-op and a corporation, firm, association or other entity in which the director has a substantial financial interest," says Steven Wagner, partner at Wagner Berkow Brandt (a Brick sponsor). "Technically, the statute does not reach a transaction involving a board member broker in which the broker receives a commission." 

That said, there are other considerations that obligate the board member, or in your situation, the board member's spouse, to disclose the sale of a unit in your building. 

"I have no doubt that a broker on the board should not vote on or be involved in any consideration of an application in which she may receive a commission," Wagner says. "Not only is the appearance bad, but there could be questions about whether the vote of that director was made in the best interests of the corporation. Also, the existence of fees and a flip tax payable to the co-op may be seen as creating a financial interest between the parties to the sale and the co-op." 

In other words, even if the broker's transactions do not technically violate the new BCL amendment, they should play it safe and disclose. Where and when this information is shared isn't specified in the law, but the board president may want to disclose in a report to all shareholders at the annual meeting.